Can Jayalalithaa restore Tamil Nadu’s economy?

Can Jayalalithaa restore Tamil Nadu’s economy?

J. Jayalalithaa, Chief Minister of the Indian state of Tamil Nadu, has survived a fierce re-election contest. How will the election results impact the challenges ahead for Tamil Nadu and neighboring states’ economies?

Just a few short months ago, the odds appeared set against Tamil Nadu’s Chief Minister, J. Jayalalithaa, and her party—the All India Anna Dravidian Progress Federation (AIADMK). A centrist populist party in power since June 2015, AIADMK was struggling to shake off negative perceptions of the government’s inadequate response to historic flooding in Tamil Nadu last December.

A decisive electoral outcome

A victory for Jayalalithaa

Source: Election Commission of India

However, following the counting of the local Legislative Assembly election results, the party has secured over 134 seats in the state body and will officially retain power—the first re-election victory for the party since the 1980s. AIADMK’s main electoral opposition, the DMK party, fell short of securing a majority vote share in spite of a smooth and technically savvy campaign carefully managed by MK Stalin, the son of party founder M. Karunanidhi.

In all likelihood, M. Karunanidhi’s failure to pass the torch of leadership to his son may have played a role in the party’s defeat.  In addition, inner-party conflict—though considerably in decline when contrasted with previous years—continues to plague the DMK.

Despite these chronic weaknesses, the election was not a total loss for the state’s oldest leftist Dravidian party. The DMK ultimately gained 89 seats, and will likely be a formidable opposition for the AIADMK’s policies in the coming term.

Regardless, the decisive election verdict will likely bring political stability in Tamil Nadu for the next five years. City and state governments are essential building blocks for national economies and — just as California is viewed in the U.S. — Tamil Nadu has been recognized as key to India’s economic growth.

With Jayalalithaa comes risk

Yet, looking at the present state of local finances and policy stasis during the last phase of previous government, there is no certainty that political stability will translate into reigniting of the state economy.

Most alarmingly, the revenue deficit of the state reached more than a billion dollars in the previous financial year. With the same party that oversaw that deficit rise now retaining power, it is initially difficult to see how the state’s financial trajectory may be altered.

Making matters worse, a phased alcohol prohibition pledged by the AIADMK during campaign would potentially make the fiscal situation even worse. Tamil Nadu’s annual revenue from the sale of alcohol through state-owned retail outlets is estimated to be close to 3 billion US dollars, which is close to one-third of total state revenue.  

An additional problem is the increase in payout of salaries and pensions to the large Tamil Nadu bureaucracy, which is unfolding as a result of recommendations from the central pay commission.

To offset these losses, Jayalalithaa needs to usher in urgent measures to streamline the administration and improve investment climate. The Ease of Doing Business index for Indian states index ranks Tamil Nadu 12th among the pool of states that need to accelerate reforms, which include hastening the utility connection process and streamlining tax regulations.

Issues with the latter became evident with recent controversy surrounding a state sales tax notice to Nokia (in addition to the federal government’s tax notice) that partly led Foxconn to close down its manufacturing unit in Chennai.

Power woes for the state are also far from over, as there has been no visible effort to address systemic issues afflicting the sector. Due to inefficient management, Tamil Nadu’s state-owned distribution company continues to remain one of the most indebted in the country.

While many states across India have joined the Modi government’s power sector revival scheme, Tamil Nadu has been stubborn in refusing to join the program. With these power freebies seemingly refused, the prospect of a turnaround looks very unlikely. The state’s once-touted solar power policy has been similarly underwhelming for Tamil Nadu, with only 220 MW getting generated in four years.

Furthermore, doing business is complicated by corruption that has reached endemic proportions in the state — mainly due to politics of patronage and the decisive role of cash flows during elections at every level.  

With investors flocking to the neighboring states as a result — particularly Andhra Pradesh — the southernmost state needs to embark on a mission to revive the investment climate.  According to media reports, the inaccessibility of the Chief Minister and her cabinet has put off investors, who can more easily reach officials in other state governments.

While the strong state bureaucracy in Tamil Nadu may roll up its sleeves and steer the state back on track, Jayalalithaa’s ailing health problems are yet another concern. If her health problems continue, she could become even less accessible than she is now. Moreover, in the event of an adverse verdict on the disproportionate asset case by the Supreme Court, the state government could become paralyzed.  

Jayalalithaa has no second-rung leadership in the party beneath her, heightening the risk of policy stasis in the event that either of these threats render her disposed from the seat of governance. Such gridlock was first witnessed during 2013-14, when the reins of power were temporarily held by the deputy of Jayalalithaa, O. Paneerselvam.

In sum, a heavily centralized government —  whatsoever its benefits — comes with its own set of risks. In Tamil Nadu, the risks outweigh the benefits. The only saving grace is the state’s human capital.

This article was a collaborative effort between GRI Analyst, Sundar Nathan and GRI Guest Post Editor and Senior Analyst, Chris Solomon.

About Author

Sundar Nathan

Sundar is currently a contributing analyst for IHS. Prior to that, Sundar was a project member at the Institute for Defence Studies and Analyses. He also worked at the Janaagraha Centre for Citizenship and Democracy where he helped launch a comprehensive study of urban governance in India. He has a Masters in International Public Policy from University College London.