Tamil Nadu needs an economic reboot

Tamil is an ancient language which jostles Sanskrit on antiquity but remains in vibrant, modern use. It is also a cultural identity. Post-Independence, in 1947, the erstwhile Madras Presidency became the Madras State within the Union of India. In 1956, its borders were redrawn to shed the non-Tamil speaking peripheral areas of Andhra Pradesh, Karnataka, and Kerala. In 1969, the state was renamed Tamil Nadu—the land of the Tamils.

Tamil Nadu remains rooted in its rich culture, which is simultaneously (and paradoxically) fiercely inward-looking and internationalist. The willingness to even forgo territory just to achieve linguistic homogeneity illustrates the premium it places on cultural cohesion. But the Tamils are far from being isolationists. Under the Chola dynasty, more than 1,000 years ago, their marine flotillas established influence over parts of modern-day Southeast Asia. Tamil expatriates (NRIs), of whom a majority work in the Gulf states, are estimated at around 2.2 million. Another 3 million of the 19 million Indian origin diaspora globally are of Tamil origin, who are a dominant business minority in Southeast Asia, Africa, Europe, and North America.

Tamil Nadu junked the post-Independence, political dominance of the national party (Indian National Congress) as early as 1967, showing a supremacy of the subaltern in its politics. Tamil parties—off-shoots of “Periyar” E.V Ramaswamy’s Justice Party—have ruled in Chennai ever since and derive salience as protectors of Tamil culture.

Sustainable development

On the SDG Dashboard, Tamil Nadu is third best in a tie with Himachal Pradesh and just behind the leading Kerala, illustrating its judicious blend of sustainable growth and good quality public services. Its per capita income is in the top one-third of the eighteen big states, just ahead of Maharashtra but behind Gujarat (2018-19). It is the go-to state for automobile manufacture, though some recent reports suggest that TESLA prefers Mundra, Gujarat for its future Indian operations.

IS TAMIL NADU RETAINING ITS LEAD?

Sadly, a glorious past does not necessarily ensure a productive future if path dependencies persist and there is resistance to creative destruction. How resilient is Tamil Nadu’s future competitiveness?

We compare Tamil Nadu within a set of eight states—Andhra Pradesh, Gujarat, Haryana, Karnataka, Kerala, Maharashtra, and Telangana—with a robust state machinery, a history of entrepreneurship, per capita income higher than the median for 18 biggest states, and a combined share in national industrial value addition of two-thirds in 2019-20.

The metrics

We use blunt proxies—economic growth and fiscal deficit for state capacity; minimum wages for social welfare; value addition in industry and services for successful transition to high value economic growth; and “good jobs” and share in exports as a proxy for competitiveness.

Growth

Five out of the eight states, including Tamil Nadu, exceeded the 8.2 percent annual GDP growth (national, constant) during 2004-05 to 2011-12 whilst three grew within 1 percentage point below the national average (Table 1)

In the succeeding period 2011-12 to 2019-20, national growth slowed to 7 percent per annum, but all the states, except Kerala and Maharashtra, exceeded that level. Gujarat retained a stellar growth trajectory while Karnataka bucked the trend and ramped up growth. However, Tamil Nadu and Telangana recorded significant declines from their earlier, high-growth levels.

The policy question behind divergent growth trajectories is, can Tamil Nadu become more resilient to slowdowns, like Gujarat and Karnataka? Two options suggest themselves—diversification away from traditional, labour intensive exports and enhanced diversification from industry and agriculture into the services economy. Tamil Nadu lags in both areas.

Fiscal management

Fiscal management in Tamil Nadu suffered since it rides an escalator of demands to feed its social justice-inspired, extensive welfare system, from midday meals for children initiated early on in the late 1950s to “Amma’s Kitchens” initiated by late Chief Minister J. Jayalalithaa.

Its fiscal deficit (FD) in 2019-20, at 3.3 percent of Gross State Domestic Product (GSDP), is comparable to Kerala—another exemplar for welfare administration—and lower than Andhra Pradesh at 4.6 percent. But it is a far cry from Karnataka’s FD of 2.5 percent, Haryana’s 1.6 percent, or Gujarat at 1.8 percent. Fiscal rectitude would be helpful as would more tax effort.

Increasing its “own-tax-revenue” from 6.7 percent of GSDP in 2019-20 to, at least, the 7 percent Andhra and Telangana manage or the 7.1 percent which Maharashtra collects and targeting the 7.7 percent of GSDP collected by Kerala is necessary. Enhancing non-tax revenues from 0.7 percent of GSDP to the 1.7 percent collected by Kerala or the 1.6 percent collected by Telangana could relieve the fiscal stress and create room for higher developmental expenditure.

Tamil Nadu’s liabilities are at a high 25 percent of GSDP versus 17 percent in Maharashtra, 19 percent in Karnataka, and 20 percent in Gujarat. High liabilities reduce fiscal resilience in downturns. They also reduce state capacity to continue the welfare schemes and public services which define the ethos of Tamil Nadu.

Social and Economic justice

Tamil Nadu wears its’ “social justice” commitments on its sleeve. Minimum wages for rural, non-agricultural workers are second only to Kerala, which has the highest wage rate. Wage rates in Haryana, Andhra Pradesh, Karnataka, Maharashtra, and Gujarat are lower than Tamil Nadu by 14 to 47 percent. High minimum wages can impair new investment unless matched by higher productivity.

Industrial opportunities and jobs

Tamil Nadu has the largest number of industrial enterprises. But value addition is the highest in Maharashtra at 15 percent of the aggregate industrial value addition for all states, followed by Gujarat at 12 percent and Tamil Nadu at 10 percent.

Post-liberalisation, the share of these eight states in the industrial value addition of all states increased from 56 in 1993-94 to 67 percent by 2019-20. Maharashtra retains its industrial dominance, but Gujarat has used the trend of industrial concentration at the top to shoulder past Tamil Nadu—an opportunity lost.

Competitiveness

The capacity to export evidences a state’s competitiveness. Tamil Nadu does well with the third highest share. Maharashtra’s high share is driven by an economy and population around 60 percent bigger than Tamil Nadu. But Gujarat has comparable demographics and GSDP with twice the share of Tamil Nadu.

Tamil Nadu does better than Andhra Pradesh on the eastern seaboard, Odisha, and West Bengal with shares of 2 and 3 percent. Karnataka and Kerala, have low shares, comparable to their land-locked counterparts Haryana and Telengana.

Tamil Nadu’s high export share reflects its industrial foundation of labour–intensive industry. But future growth will come from targeted re-industrialisation away from old product lines to young companies, start-ups and high-tech product lines in chemicals and pharmaceuticals.

Growth in services, urbanisation, and good jobs

A higher share in Gross Value Added (GVA) in services versus manufacturing, is another option for value addition and “good” jobs.

Karnataka has the highest share for services in GSDP, nearly three times of its share of the industry. Tamil Nadu, like Maharashtra or Gujarat, with a higher share of the industry, has yet to transition to services. The Gujarat International Finance Tec-City could change that decisively.

Share of services in value addition is a blunt proxy for good jobs. But is strongly correlated with urbanisation and the digital economy where much of the value addition is happening globally.

The knowledge economy

report on innovation potential and preparedness identifies the structural constraints which keep Tamil Nadu from realising its true potential. There are not enough “good” jobs to absorb its high-quality technical workforce because of low investment in R&D-related firms and entities, as evidenced by low registration of trademark and industrial design applications, grassroots innovations, start-ups or new businesses.

wHEN YOU KNOW WHAT YOU DON’T KNOW

Tamil Nadu has dialed overseas for help with economic strategy, egged on by its new Finance Minister Palanivel Thiagarajan. A banker, he reverse-migrated from the US in 2014 for a career in Tamil politics and is now the MLA from Madurai.

The Chief Minister’s new Economic Advisory Council comprises Raghuram Rajan, the ex-Governor of the RBI; Arvind Subramanian, former Chief Economic Advisor to the then Finance Minister Arun Jaitley; Professor Jean Dreze; exponent of the science of immersive research for solutions to the practical problems of poverty and state accountability; Esther Duflo, the Nobel Laureate, best known for the application of clinical trial approaches to field experiments, to test policy options targeting poverty and veteran; and bureaucrat Dr S. Narayan, former Union Finance Secretary.

Making the welfare state better

There is delicious irony in a mixed bunch of neo-liberal and left-of-center economists, advising a Chief Minister named MK Stalin. But then, in our post-ideology world, Communism itself has come a long way from Joseph Stalin’s USSR, as evidenced by President Putin’s “liberalized” Russia or President Xi’s “Capitalist” China.

Tamil Nadu with its historical commitment to state-led “social justice” and a thriving private sector, is fertile ground for ideating the future holy grail – a fiscally stable middle path, between growth and the economic rights of citizens, whilst ensuring reasonably efficient, fit-for-purpose state capacity. Dr. S Narayan is sure to have his hands very full in the coming days.

Extracted from the Authors piece on orfonline.org July 10, 2021 where it was first published.

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