Constitution doesn’t give PM right to intrude into states’ budgetary process: Tamil Nadu FM PTR

'The notion of welfare spending, even if one argues that it is irresponsible, should be subjects of debate between voters and the vote seekers'

Prime Minister Narendra Modi should stop advising state governments on how they should spend their money effectively usurping the rights of the state-elected representatives, Tamil Nadu Finance Minister P T R Palanivel Thiaga Rajan told DH’s ETB Sivapriyan in an interview.

He covered a wide range of subjects from freebies to TN’s growth story to the politics over fuel prices to GST to the performance of the Economic Advisory Council to steps being taken to revitalise the state’s finances. Excerpts:

There is a fresh debate on the freebie culture. The Supreme Court is also hearing a case on freebies and Prime Minister Narendra Modi himself has warned people about the ‘revadi’ (free) culture. What is your opinion on his statement?

I believe that the Constitution has provided specific rights to elected officials at different levels of government and different rights and responsibilities to the judiciary and drawn the boundaries of such rights. The notion of social spending or welfare spending, even if one argues that it is profligate and irresponsible spending, should be subjects of debate between individuals, i.e., the voters and the vote seekers. I don't see any role for the Supreme Court or any court in this debate, not just in India, but in any Constitutional democracy.

Read | DMK says socio-economic development initiatives cannot be termed 'freebies'

Coming to the Prime Minister, of course he can make his arguments as a politician on a campaign trail. But if he assumes that the Constitution gives him powers, as the Prime Minister, to tell state governments how they should or should not spend their money or how they should campaign and should not, then I say he is wrong. His comments are anti-constitutional. I also say it smacks of hypocrisy on the part of the Prime Minister, who himself has initiated a host of what can be termed as freebies, to turn around and say, I can do it, but others can’t.

Why do you say that the PM’s comments are anti-Constitutional?

The Prime Minister was elected as an MP, and he is the leader of the government after having been chosen by his party MPs. Does the Constitution give the Prime Minister the right to intrude into the budgetary process of the states? The Constitution clearly says the state Budget has to go through the state legislature. He (PM) is not even a member of the legislature and on what basis does he have input into the nature of spending in states? That is why I ask why he (PM) should dictate. And now I go the reverse. The Union already controls the states in a hundred ways, and they use those opportunities to the hilt.

One should separate politics from execution. If all that the Union wants is to restrain profligacy in states, they already have all the tools that they need. They (Union) don't need to come and talk about it on platforms. They can act on it directly. If they make political statements, then our question is on what basis? The Constitution says the legislature of each state approves the budget, not an MP, or not the PM. Even MPs elected from Tamil Nadu don’t get to say anything about the state budget, only MLAs do. How can the Varanasi MP (the PM) have anything to say about the Tamil Nadu budget? Where in the Constitution is it allowed?

DMK and other parties have always objected to usage of the term freebie saying it insults the beneficiaries. Do you think a clear distinction should be made between freebies and welfare measures?

We have said it before, and I will say it again. The word freebie is meaningless. And so much so, the Terms of Reference (ToR) for the 15th Finance Commission used the term populist measures, not freebies. We believe freebie is an ill-defined term that can be misinterpreted. I believe welfare measures should be nuanced, thoughtful and driven by a philosophy.

For instance, the bulk of the BJP government’s welfare measures like cutting of corporate taxes, and waiver of bank loans go to large corporates and ultra-rich people. Those are also welfare measures, but they are targeted, in my opinion, at the wrong class of people in a democracy. We should have a separate debate on the effectiveness and social justice aspects of different social sector spending from the perspective of the notions of democracy and socialism.

Read | Freebies are never 'free': RBI MPC member Ashima Goyal

Some social sector spending is likely to have much more impact on people's lives, much less risk of inflation and much more equity inducing, or equity protecting, characteristics than others.

Tamil Nadu assumes the centre stage whenever the freebie debate is raked up in the country. And in response to Union Finance Minister Nirmala Sitharaman’s speech in Parliament, you said the state was frequently targeted. Why did you say so and why is TN always equated with freebies?

It is an attempt to denigrate the outcome of Tamil Nadu which is unique and phenomenal. TN’s growth story is really about the quality of governance and the philosophies of inclusion, social justice, and self-respect. People who use slogans like freebies and try to castigate or cast aspersions should explain why Uttar Pradesh or even Gujarat has not been able to replicate TN’s success.

For all its economic benefits, Gujarat has not been able to replicate the social component of inclusion that TN has achieved. I think much of the targeting is either envy or politics. It is like if I can’t achieve like them, then I will try and denigrate what they have achieved.

Is the criticism of Tamil Nadu vis-a-vis freebies because of universalisation of schemes? Don’t you think welfare measures should be targeted rather than free for all?

There is no black-and-white answer on whether targeting is necessary. Everyone will agree that the rich should not get free rice, but they should also agree on the other extreme that one should not be so focused and narrow on targeting the beneficiaries that might lead to exclusion of some deserving people. I don’t have a problem with a few non-deserving individuals getting the benefits because the cost of enforcing should not leave out any intended or deserving beneficiary.

But any compassionate and caring government will find ways to ensure that no deserving beneficiary is left out. And what I am not willing to accept is the hijacking of such schemes by vested interests who figure out how to exploit a system intended for individuals and use it instead to enrich themselves on a large scale. In my mind, this is unconscionable. Any competent and empathetic government which still has a conscience will go out of its way to stop this, and that is the fine line of the so-called targeting.

What is your response to the view that states like Tamil Nadu will soon meet Sri Lanka’s fate because of the freebie culture?

Tamil Nadu is possibly the most different of all the states in India relative to Sri Lanka. The economic conditions in Tamil Nadu are better than most states in the country even after seven to eight years of decay and mismanagement of the post-2014 AIADMK as the post-Jayalalithaa regimes did not clearly understand how to govern a large state.

Even after that decay, we are still much better than 75 per cent of the states in debt to GDP ratio and other measures. And in two years, our ratios will be among the best four or five states in the country. So, I think people who are using Sri Lanka to target us should worry about more debt-laden states than Tamil Nadu.

There is an opinion that social welfare schemes drain the economy affecting growth. What is your answer?

We have a very clear Fiscal Responsibility and Budget Management (FRBM) Act, 2003 and an equivalent act (FRA) at the state level that constraints the total debt. If the Union decides to violate the FRBM Act, there is no second authority to restrain it from doing so. Whereas, for the states, even if we amend our FRA, in the case of Tamil Nadu, the Union gets to have two controls on us. All our acts will have to be signed by the Governor or the President.

The BJP dispensation in Delhi has weaponised these approvals in a way that no democratic regime has done in the past. It is an unpardonable assault on Democracy, and a black mark, that such files languish in the mansions of the Governor or the President, without being approved. The second way through which the Union controls the states is Article 293 (3) of the Constitution which says as long as states owe the Union Government the money, states can’t borrow money without the Union’s approval.

The Union uses this basis to completely control how much we borrow. So, the Union Government has very tight macro controls on the overall spending of a state, and therefore the odds of unrestrained profligacy by any state – in terms of annual fiscal deficit or debt-to-GDP - are exactly zero.

On the other hand, if they want to use the mandate of winning a majority of MPs in the Lok Sabha as the basis to tell state governments how to run their finances, to effectively usurp the rights of the state-elected representatives, we will of course totally resist that. Why should we allow it? We don't even allow the MP of North Chennai to tell us how to spend the state’s money. Only the MLAs get to make that decision. Why should we allow the MP of Varanasi or some other constituency in Uttar Pradesh or Madhya Pradesh or Gujarat to say how the money of the government of Tamil Nadu and its people should be spent?

You have been one of the vocal critics of the Union Government’s handling of the economy. At one point you even said those who have failed in handling the economy should stop advising states. Don’t you think your comment was unfair? Was it driven out of politics?

No, it is just factual. I think the dramatic problem began with demonetisation which was like exploding a nuclear bomb on the economy. Then we had the implementation of a half-baked GST that badly damaged MSMEs and the semi-formal sector. And then we had the pandemic. If things had been going fantastically well before the onset, the pandemic would still have been a bad jolt to the system. But since things were so badly managed, the pandemic was like the second-last nail in the coffin.

But beyond all these, in a functional democracy, economic policies are made after a thousand voices are heard and adequate debate ensues. The minute you make it authoritarian, and on an ‘because I say so’ basis, then you are doomed to failure. This is the last nail in the coffin. Even the changes and modifications that might actually be positive reforms, will first and foremost be seen as authoritarian intrusions because nobody has had a chance to participate in the debate. The more authoritarian, the more centralised, the less debated, and the less external input, the greater the likelihood of failure.

BJP has taken objection to your criticism of the Union Government and party spokesperson Sanju Verma has issued a “rejoinder” asking you to first concentrate on Tamil Nadu’s finances which she said are in shambles. Your reaction?

Last week, I learnt more about the right-wing demagoguery platform led by the 21st Century Goebbels, Amit Malviya. The theory that cults and intellect cannot go together was proven 100 per cent true because this alleged right-wing “intellectual” turns out to be a hack who has taken the RBI’s risk assessment report, extracted some concepts rather amateurishly from the note and then the demagoguery machine has swung into action. They have used this amateurish hack to get excerpts out of an RBI report - without citing the source - and published it on their ‘home base’ platform.

Then they have used an ‘anchor’ from their stable to propagate this half-baked nonsense. If they wanted to really show how precarious TN’s Finances were, they could have simply published either the RBI report itself, or better yet, the White Paper I published last August within 3 months of taking office. But the problem with either of those would have been that it would have been clear that the precarious financial condition of Tamil Nadu was because of seven years of post-Jayalalithaa misrule by the AIADMK. The report doesn’t reflect on the DMK’s performance. So, when they use the report that criticises their own coalition partner’s tenure to attack me or the DMK, it is like a self-goal. It shows that between all of them together, they can’t match one decent intellect.

This brings us to the question of what Tamil Nadu has achieved in the past year after DMK assumed office. The outstanding debt which stood at Rs 5.77 lakh crore as of March 31, 2022, is projected to increase to Rs 6.53 lakh crore in March 2023. Why is the debt increasing and how are you improving the finances of the state?

In a developing country, the overall debt never goes down and the FRBM Act also doesn’t say states should have zero fiscal deficit. It says they can have a 3 per cent fiscal deficit and I have always maintained that debt is not bad, but I have pointed to two real risks. First, increasing total debt so rapidly that one cannot keep up with the interest payments. And second, using the debt to cover revenue deficits rather than capital investment. The AIADMK regime took the debt to GSDP ratio of Tamil Nadu up from around 16-17 per cent to 26-27 per cent in the past seven years. Despite two waves of COVID, more rains than 2015, and fulfilling poll promises, we kept it roughly flat last year, the first year after coming to power. We are confident we will bring it down in the next few years though it will take six or seven years to bring it back to the 16-17 per cent levels of 2014. But at 26 per cent, Tamil Nadu still has a lower debt to GSDP ratio than most BJP states, and far lower than the Union which has an almost 90 per cent debt to GDP ratio.

My ambition is to become revenue neutral by 2024-25 and under the FRA act, I will still be eligible to borrow 3 per cent of GSDP for capital expenditure. So, my ambition will be to borrow Rs 90,000 crore in 2024-2025, and spend 100 per cent of it on investments, because investing the money wisely will have a big impact on the economy.

Spending by the Government will have a multiplier effect, especially when the government invests in as productive and return-generating ways as possible. Of the roughly Rs 86,000 crore that TN borrowed in 2021-2022, about Rs 58,000 crore went into tackling the revenue deficit (revised estimate), and we were able to utilise only the remaining Rs 28,000 crore on capital expenditure.

In 2024-25, I want to use the entire Rs 90,000 crore on capital expenditure. These are two completely different stories and anybody who has studied the basics of economics understands the difference.

As the Finance Minister of Tamil Nadu, you put together an Economic Advisory Council to the Chief Minister consisting of global experts. What has been the outcome of the deliberations with the five experts in the past year?

When we constituted this team in 2021, the only person who came with a lot of preconditions was Nobel Laureate Esther Duflo because she felt that there would be so many internal discussions within the panel before drafting of the report, which is often neutered or watered down to balance many interests. And sometimes, the report gathers dust and doesn’t get implemented. I agreed because I know writing reports is easy, but the execution isn’t, and we had a live example of the C Rangarajan Committee constituted by the then AIADMK government gathering dust. This model of consulting the experts collectively or individually has been probably 20 times more productive than what we could have achieved through a traditional committee that might have met once in three months.

In the past year, I must have spoken 12 to 15 times to each one of the advisors, and they must have spoken to a minimum of 30 to 40 senior IAS officers of the Government of Tamil Nadu. Raghuram Rajan and Arvind Subramanian visited Tamil Nadu about five times each, Jean Dreze was here twice or thrice, S Narayanan lives in Chennai, and Esther Duflo came here once. The personal engagement of Esther Duflo who is not from Tamil Nadu or India and Jean Dreze is amazing. We have received consultation visits and short papers from many professors, including those from MIT, Harvard & Yale. The diligence, time, and connectivity that we have got with such experts is just phenomenal.

We have had at least five world-renowned professors coming here or send us inputs on power sector reforms, property tax management, education, and health.

Another major issue over which you often target the Centre is fuel prices. You criticised the Centre for asking states to cut fuel prices. Though the Centre cut the price twice in a year, TN hasn’t reduced the prices except for petrol which is a poll promise. Is your criticism justified?

Even after effecting the rate cuts, the Union tax on petrol is more than 2X, and on diesel is in the range of 5X, compared to the rate they inherited in 2014. They have changed the overall taxation model to indirect taxes from direct taxation to benefit their friends and crony capitalists. In the history of DMK, we have never raised VAT on fuel. Even the small amount of increase in the price effected by the AIADMK wasn’t much – I may accuse them of many other things – but it was not even a fraction of what the BJP government at the Union did.

Between their two cuts and applying of the ‘ad valorem’ taxes after Union taxes and our cuts, we have lost around Rs 4.95 on petrol and Rs 1.70 on diesel. It did not need to be this way because we directly cut only Rs 3 on petrol. I could have changed the ratio of my taxes from percentage ad valorem to the rupee (which the AIADMK government did once) to negate the impact of the Union cuts, but we didn’t do it because we wanted people to continue enjoying the benefit. But for them (Centre) to preach to us on cutting taxes is dissembling. They are experts in coming up with false arguments, false facts, and false logic to divert attention away from them and create a villain where none exists. In reality, they are the villains themselves.

DMK gave over 500 promises in its manifesto. Chief Minister M K Stalin has been saying that over 50 per cent of the promises have been fulfilled. But promises like Rs 1,000 for women heads of families and subsidies for LPG cylinders are yet to see the light of the day. When can we expect their implementation?

I don’t know. I have a different problem and I say this again. My chief minister is the only politician in the last 50 years in Indian history who keeps on saying that he stands behind everything that he has promised. No other government, at the state or the Union level, has implemented in either five or ten years, the percentage of the poll promises my CM’s government has implemented in 15 months. I am worried that from the public to the press to everybody, all have this double standard.

Every other politician in this country across history, including from the DMK, gets a free pass. People don’t hold anybody else accountable, but they put my CM on a different pedestal. They don’t care about PMs or other CMs. But they single out M K Stalin alone, saying it is a crime if he does not implement 100 per cent of the promises in the first 18 months. The criticism is unjustified, unfair, and improper. I am proud of the record that no other CM in history has implemented more promises even in their full tenures than what my leader has done in 15 months.

You termed GST as a constitutional oddity. Why did you say so? What do you think is the major problem with GST?

The problem with GST is that from the framing of the notion of GST – I say this apart from party politics to include the time of UPA -- to its design, to its rushed implementation, to the legislation and the Constitutional Amendment underpinning it, to the systems and technologies put in place, to the functioning of the GST council, to the level of attention and resources dedicated to making it successful, all of these were, and are, inadequate or less than ideal. I am not an anarchist, and I don’t try to rewrite history changes for the sake of perfection, so I am resigned to work with the far-from perfect system we have. But what worries me is that something so critical for the country’s, and for each state’s revenue, is still not being given enough support, enough attention, and enough effort. It needs a lot more focus and effort.

Whenever states raise the delay in payment of GST dues, the Union Government says it is the GST Council which takes this decision and that it has no role. Do you agree?

Within the systemic limitations, Finance Minister Nirmala Sitharaman conducts the GST council meetings in a very considerate and thoughtful manner. She is always gracious, and she allows everybody to talk. The physical meeting is conducted in a very good way.

But if I start with the simple concept like who sets the agenda, it is 100 per cent dictated by the Union. We don’t get to decide what is on the council’s agenda. Then, how can it be called federal and a separate authority on its own? The Supreme Court has also said that the GST Council is only a recommendatory body, and it cannot supersede the powers of the legislations drafted by constitutional bodies like Parliament and state legislatures.