The 6th State Finance Commission meeting with Tamil Nadu Chief Minister MK Stalin and other officials, at the Secretariat in Chennai. , Photo Credit: Special Arrangement
Tamil Nadu Chief Minister has targeted Tamil Nadu becoming a trillion dollar economy (by 2030), as he has indicated in the past year. This is a nice aspirational goal. Tamil Nadu’s GDP this year is expected to be as high as $0.31 trillion. To achieve the target set by the Chief Minister Tamil Nadu To triple the size of our economy. If this is the goal, we need to examine what the expected annual rate of growth should be in conjunction with the period over which this rate should be sustained.
possible scenario
The possibility of achieving the status of a trillion dollar economy by 2030-31 has to be ruled out at the outset. This requires a nominal annual growth rate of 18.2% and a real growth rate of 13.2% on an inflation assumption of 5%. It is not within the realm of possibility. The table presents results for a scenario that can be considered achievable given the effort required. In this scenario, the target is achieved in 2033-34, and the required real rate of growth would be 9% per cent. The exchange rate is considered to depreciate from the current level to ₹100.38 per dollar, i.e., a depreciation of 2% per annum. The nominal rate of growth required would be 14% and with an assumption of 5% inflation, the required real rate is derived as 9%. The higher the exchange rate depreciation, the higher the required nominal and real rates of growth. Under this scenario, the state’s per capita income in the terminal year would be $13,400, a shade higher than the $13,205 per capita income needed to classify a country as a developed country.
We examine the feasibility of achieving this real rate of growth in the backdrop of the past performance of the Tamil Nadu economy. From 2005–06 to 2011–12, Tamil Nadu registered a strong real growth performance of 10.3% per annum, compared to an all-India growth rate of 8.2%. However, its average annual growth declined to 6.43% from 2012-13 to 2021-22 as against the all-India growth rate of 5.48%. Thus achieving a growth rate of 9% per annum over an extended period is not going to be an easy task. With an actual growth rate of 8%, the target date would get postponed for another year to 2034-35. We should also keep this in mind as a possible scenario.
strategy
Thus, we have explained the quantitative implications of Tamil Nadu reaching a trillion dollar strong economy. There is a need for the government and all other stakeholders to formulate a suitable strategy for development. Here are some ideas: In agriculture, the state needs to move towards cultivation of highly remunerative and less water consuming crops. The food processing industry needs priority attention to prevent excessive production from being wasted. With regard to industry and services, emerging sectors such as biotechnology, pharmaceuticals, logistics and advanced information technology need to be identified and detailed plans drawn up. Infrastructure needs, especially in power, will also expand.
Exports can act as a stimulus for growth. Currently Tamil Nadu’s exports are worth $26 billion. Tamil Nadu’s exports as a percentage of Gross State Domestic Product (GSDP) is 8.87%. A stated goal of policy makers is to reach the level of $100 billion in exports. This means that when Tamil Nadu reaches a robust level of $1 trillion, the export-GSDP ratio should be 10%. Thus, there is a need for a special drive to increase the export-GSDP ratio.
The investment rate required to maintain a growth rate of 9% would be 36% of GSDP on the assumption of an incremental capital output ratio (ICOR) of 4. It has to be financed by domestic savings supplemented by inflows of resources. From rest of India and other countries. Tamil Nadu should be made a destination for investment by creating an enabling environment.
fiscal balance
A strong growth in a stable period can only happen in a stable economic environment. This implies both price stability and fiscal stability. Some econometric results suggest that with 14% nominal growth, the state should work towards a fiscal deficit of less than 3% so that the debt-GSDP ratio stabilizes at around 18%. The Fiscal Responsibility and Budget Management (FRBM) Review Committee had indicated a benchmark level of 20% for all states.
What we have presented so far can be described as the arithmetic of Tamil Nadu achieving a trillion dollar economy. What might happen a decade from now depends on a number of factors. Therefore, any projections over such a long period should be conditional. Perhaps, the most likely scenario is a modest growth of 14% per annum over the next 10 years which would take Tamil Nadu to become a trillion dollar economy by 2033-34. We explain some of the implications of this travel demand.
C. Rangarajan is the former chairman of the Economic Advisory Council to the Prime Minister, former governor of the Reserve Bank of India and chairman of the Madras School of Economics. KR Shanmugam is the director of the Madras School of Economics