Written by AK, Australia
Historical setting:
Chanakya or Kautilya or Vishnugupta, according to several sources, was an amātya (minister/royal advisor) in the city of Takshashīa in ancient Bhāratavarsha (India), modern day Taxila, northwest Pakistan. It is said that the city was originally founded during the period of Rāmāyana by Lord Rama and Bharatā. Mandavi, wife of Bharata, gave birth to two sons – Taksha and Pushkala. Bharatā named the city of Takshashīla after his son Taksha who later ruled the kingdom. Many years after, the great ācharya Chanakyā became the minister (it is unknown whether ācharya Chanakya was born in Takshashīla or not) to the king during the Maurayan empire.
Works of Chanakya:
Chanakyā was an expert in the fields of philosophy, economics, political science, military craft, law, regional and international diplomacy, governance and state strategy, a teacher, author, and a royal advisor/minister. He also is said to have been a great visionary thinker and one of the early thinkers of Bhāratam as quoted in Vishnu Puranam (see my first blog on identity).
His two great works are:
1. Kautilya’s arthashastra – A guidance to responsible governance, resource optimisation and effective fiscal/monetary policies notwithstanding other flavours from his expertism as stated above.
2. Chanakya nītī / sutra – Non-prescriptive but concise expressions of general principles and truths for an ideal way of life as per ancient Indian tradition during his time (a time without internet, fossil fuels, population, technology, automobiles, etc), therefore, some of which are relevant today and some maybe not so much.
Chanakya sutra (advise to the king):
1. Sukhasya mūlam dharmam – The root of a kingdom’s happiness is in ethical/proper conduct.
2. Dharmasya mūlam artha: - A healthy financial status ensures discharge of right duties and ethical conduct.
3. Arthasya mūlam rājyam – State’s welfare is rooted in good finance.
Whilst a detailed analysis based on arthashastra is not intended, it is, however, pertinent to note the importance of finance in developing the state. The intent is to articulate the need to shift political dimension of Tamil Nadu (TN) from caste, language and religion towards economic and financial aspects of government policies and their performance to improve a voter’s awareness/maturity in decision making and for discussions with government.
Arthashastra (encourage readers to deep dive) - 2nd Adhikaranam (Book II), 8th adhyāya (8th chapter) concerns about finances and rules:
1. Koshapurvā: sarvāramba: | Tasmāt purvakosham veksheta|| - Attention shall be paid to finance as all undertakings depend on it.
2. Pachārasamrridhi:…….koshavriddhi: || - Growth of (state’s) wealth, good conduct, capture of thieves, supporting government employees, harvest growth and management, prosperity of commerce, safeguarding during calamities, taxes and incomes, are favourable for financial prosperity.
3. Pratibandha:….koshashaya: || - Restrictions, matters of loans and interest payables, loss of revenue and fabrication of accounts, self-enjoyment, barter system and misappropriation of funds result in depletion of money.
The chapter provides guidance on financial structure.
It is evident from these works that complex systems of finance was in place during ancient times in India. It is important to note this contribution before a system of finance was known to the West. Chanakya details plans for an optimum economic condition considering demand/supply, tax structure, loans, interest rates (recommends different rates for commercial and personal), profits, revenue & managing debts, inventory management, to name a few.
Having laid the foundation/history that public financial performance and management was important to ancient Indians, it is prudent to become knowledgeable of modern day State finances. On that note, a look at TN's fiscal performance using basic indicators and ratios with references accessible for a common citizen without knowledge of complex financial concepts and models.
TN’s fiscal analysis:
Discussions around TN’s fiscal policies, generally speaking, stop at GSDP (Gross State Domestic Product). To absorb a full view of a state’s financial conditions certain other parameters are importantly, needless to say, liabilities.
TN Finance Minister’s quote from TN Budget 2021 white paper, in Ref 1, “The fiscal situation of the State is in dire circumstances, in part due to extraneous circumstances, but in substantial measure due to structural flaws in governance which have not been rectified in a timely manner……Business-as-usual cannot continue, and our approach must fundamentally change if we are to break out of this vicious cycle of increasing debt and interest costs.”
In
relation to above, Reserve Bank of India (RBI) published a document named State
finances: A Risk Analysis, in Ref 2, that provide Debt to GSDP (Gross state
domestic product) ratio, interest payments to revenue receipts (IP-RR) ratio,
revenue deficit, overall risk rating of state governments and debt to GSDP
ratio forecast to estimate financial performance of States.
1. Debt to GSDP ratio
a. Between 32.5% and 33% of GSDP.
b.
15th finance commission provided above indicative
targets, in Ref 3, Chapter 12, para 12.65 for Debt to GSDP ratio for State
Governments 2020 to 2026.
2. RBI has set, in Ref 2, interest payment to revenue receipts (IP-RR) ratio at 10%
3. Revenue deficit to GSDP ratio ideally at 0%. A -ive ratio is good financial condition and +ive deficit ratio is worse financial state.
4. RBI provided overall risk rating.
5. Forecast to 2025/26 of debt to GSDP ratio to enable State Governments to re-engineer their finance.
In Ref 2, TN’s financial condition is as below (in comparison to other major states):
|
Financial condition |
Tamil Nadu |
Bihar |
Karnataka |
Gujarat |
Maharashtra |
|
Debt-GSDP Ratio (2021-22 RE) |
27.4% |
38.6% |
26.6% |
19.0% |
17.9% |
|
IP-RR Ratio |
21.0% |
8.6% |
14.3% |
14.2% |
11.4% |
|
Revenue Deficit-GSDP Ratio |
2.5% |
5.5% |
0.4% |
0.0% |
1.0% |
|
Overall Risk Rating (Bail out including DISCOM to GSDP) |
5.2 |
0.8 |
1 |
0 |
1 |
|
2025/26 Forecast of Debt-GSDP Ratio |
31.0% |
31.2% |
22.6% |
16.6% |
18.6% |
Reasons for overall risk rating above for TN, as per RBI report in Ref 2, are possible high inflation within the state, rising yield and distribution of freebies.
Conclusion:
Despite RBI’s indicators, TN’s budget for 2023-24, in Ref 4, include an increase of 52% from previous year in social welfare (a budget of 26,614Cr for 2023-24) with reduction of urban development (Chennai Metro Development Authority) by 19% leaving only Rs. 8,331 Cr for 2023-24, reducing rural development by 3% and reducing energy by a massive 53%.
Few points to consider:
Are State finances managed by competent minister?
Are the right policies in place to improve financial performance and to promote growth?
What should be government priorities and focus to improve financial condition whilst balancing budget across all sectors?
It
is envisaged that this blog provided useful insights to financial
performance of a State, inspired by the great Chanakya of Takshashilā, and
that it leads to discussions on financial matters of the state especially
during elections. Referring to Chayankya arthashastra, policies/schemes should find an optimum balance across sectors: urban development/infrastructure,
energy, social welfare, education , etc to be effective as the
world looks to India for opportunities to invest and do business.
For those interested, I have added, in Ref 5, – RBI’s handbook of statistics on Indian Economy.
References:
1. White Paper on Tamil Nadu Government Finances: https://tnbudget.tn.gov.in/tnweb_files/white_paper_2021_english.pdf
2. RBI - State Finances: A Risk Analysis - https://www.rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=21070
3. Finance Commission report : https://fincomindia.nic.in/writereaddata/html_en_files/fincom15/Reports/XVFC%20VOL%20I%20Main%20Report.pdf
4. Tamil Nadu Budget Analysis 2023-24: https://prsindia.org/budgets/states/tamil-nadu-budget-analysis-2023-24
5. Handbook of Statistics on Indian Economy: https://www.rbi.org.in/Scripts/AnnualPublications.aspx?head=State%20Finances%20:%20A%20Study%20of%20Budgets
