Rating Rationale

Strengths
* Favourable GSDP composition
Tamil Nadu's (TN's) GSDP composition compares favourably with the national gross domestic product (GDP) composition, as well as with the GSDP of other CRISIL-rated states. For fiscal 2017, TN derived 33% and 56% from the secondary and tertiary sectors respectively. With the primary sector accounting for only about 10% of the state's GSDP, which is well below the national average of about 15%, TN has relatively lower dependence on agriculture.

CRISIL believes that a vibrant economy with strong secondary and tertiary sectors results in continuous improvement in a state's revenues. Overdependence on the primary sector usually limits a state's revenue resources unless it has a significant competitive advantage in the sector.

* Strong socio-economic indicators
TN's socio-economic indicators are superior to the national average and to that of other large CRISIL-rated states. The state's urbanisation, as defined by the percentage of urban population in a state, is at 48% (2011 census), which is higher than the national average of 31%. Its per capita income for fiscal 2017, at current prices was Rs 139,216 which showed a 7% growth from last year.

Its literacy rate of 80% (2011 census) is better than the national average of 74%. Similarly, TN's sex ratio of 995 females per 1000 males (2011 census), is better than the national average of 940 females. Its infant mortality rate was 21 deaths per 1000 births in 2012, against the national average of 42. CRISIL believes that a balanced economic structure with a well-developed demographic profile is a testimony to the state's superior socio-economic infrastructure and augurs well for its future economic growth.

Weakness
* Average fiscal position
GoTN's financial risk profile has moderated with strain primarily due to widening RD. The RD/revenue receipts (RR) ratio has gradually increased to more than 10% in fiscal 2018 from a 1.7% in fiscal 2014 led by subdued own-tax collections and high subsidy outflows. The continued high deficit and moderately high indebtedness (ratio of total debt and guarantees to GSDP) may adversely impact its fiscal position and constrain its overall credit profile.

TN's tax effort, measured by its own tax revenues as a percentage of GSDP has declined to 6.4% in fiscal 2017 from 8.7% in fiscal 2014, mainly on account of the fall in crude oil prices which impacted value-added tax (VAT) collections from petroleum products (as VAT rates are ad valorem). TN has sought to offset the impact partially by increasing the VAT rates on petrol from 27% to 34% in fiscal 2017. Closure of TASMAC stores (about 500 such stores were closed by the state) could also impact tax collections, though it would be muted given that alcohol expenditures are relatively inelastic.

Widening RD has impacted the government's GFD and indebtedness which remain higher than expected. The GFD/GSDP has significantly increased to 4.6% in fiscal 2017 (revised estimates [RE], includes one off impact of UDAY). Even adjusted for UDAY, the GFD/GSDP stood at 2.9% for fiscal 2017 which is close to the prudent Fiscal Responsibility and Budget Management (FRBM) limit of 3%. Indebtedness at around 24.5% as of March 31, 2017 (RE) also remains moderately high.

* High levels of committed expenditure
GoTN's expenditure profile carries high levels of committed expenditure, including pension, salary, and interest payments. The state government's expenses on these heads was high at about 55% of its revenue receipts in fiscal 2017 (RE). Although the ratio of committed expenditure to revenue receipts has decreased from higher levels in the past (72.6% in fiscal 2010) on account of the increasing trend in revenue receipts, it is still amongst the highest levels across all CRISIL-rated states. CRISIL believes GoTN's high levels of committed expenditure will continue to impact its financial flexibility over the medium term. These are likely to increase on account of implementation of the state's pay commission recommendations announced in fiscal 2018, thereby adversely impacting the quality of state's expenditure.

* Moderate economic management
The weak position of the state's power sector moderates its economic management. The state has taken over a part of TANGEDCO's debt under UDAY (Rs. 22,815 crores in Fiscal 2017). It has not undertaken any tariff revision since fiscal 2015 and there are electoral promises of free electricity of 100 units. The state however manages its liquidity well and has not used its Ways and Means Advances since 2004.

While TANGEDCO is continues to be loss-making, there is an improvement from earlier levels. The deficit of TANGEDCO has reduced from Rs 12700 crore in fiscal 2015 to Rs 8500 crore in fiscal 2016 (budgeted to reduce to Rs 6300 crore crores in fiscal 2017) subsequent to the implementation of revenue augmentation and cost control measures. As a result, the gap between Average Rate of Realisation and Average Cost of Supply has reduced to Rs. 0.33 per unit in fiscal 2017. In order to improve the financial position of TANGEDCO, the GoTN has continuously provided financial assistance.