Economics of politics: SL-Tamil Nadu scenario

By an Independent Analyst
The State Assembly of Tamil Nadu (TN) passed a resolution on 8 June 2011, requesting the Indian Central Government to push the international community against Sri Lanka towards imposition of ‘economic sanctions’.  The resolution at the TN assembly moved by Jayalalitha as the Chief Minister passed unanimously with the ruling party majority.

Jayalalitha won the last assembly election with a sweeping victory over former ruling party DMK, headed by a veteran politician M. Karunanidhi. As reported by the media, Jayalalitha has fired her first bullet against Sri Lanka just after declaring her party victory at the last assembly election. Even before she was sworn in as the Chief Minister of TN, she demanded an investigation against Sri Lanka over the conduct of the final stage of the war against the LTTE.
It is known that Jayalalitha herself an anti-LTTE campaigner, who even had threats to her life from LTTE earlier. It is bit dubious why Jayalalitha has taken aboard this matter along with the Kachchatheevu saga so soon without having more compelling and immediate political reasons. Since the AIADMK led by Jayalalitha won convincingly at the last assembly poll and at the same time the election has proved that the pro LTTE elements in TN have been badly defeated. Therefore, there is no logical political reason her to take Sri Lankan matters so early. However, the purpose of this article is not to analyse the motive of Jayalalitha’s current political moves over these issues, but to discuss the prospects of economic and commercial aspects between the two countries under the new TN regime.
When considering the federal system and the powers, rights and obligations of the States in India, State Government sponsored resolution adopted at the TN Assembly cannot be simply overlooked or undermined. It is true, though the decision making powers over a matter like ‘economic sanctions’ against a country is fully vested within the purview of the Central Government, the message and the signals that have been given by this type of resolution, specially moved by the Chief Minister herself, will have a detrimental impact on the two way relations, including the commercial and economic sphere. It is a sovereign right of Jayalalitha and her government to move whatever the resolution at their Assembly for whatever ends and means. However, everybody has to be mindful of the fact that the reverses would also be a possibility, where Sri Lanka may also resort to a similar retaliation even without a resolution; as it did happened during late 80s against Indian originated products.  If it happens, Indian exporters, including Tamil Nadu businesses will have to seek a US$ 2 bn market elsewhere, while Sri Lanka will have to find only one fifth of that amount. Given the current world economic scenario, blocking and retaliation of free movement of goods and services serve no purpose either to Sri Lanka or to TN.
According to media reports, the recent developments in the state of Tamil Nadu that have taken place in the aftermath of this resolution are disturbing, especially to the economic and commercial relations. As was reported, one of the pro LTTE lobby group named themselves as ‘May 17 movement’ has started a campaign to boycott Sri Lankan products and services. This movement, though not significant in terms of followers as yet, has made some impact through their campaigns conducted in TN. The situation worsened a few weeks back in the back drop of attacks unleashed against Sri Lankan pilgrims in Chennai as well as the some incidents reported at the Velankanni Church. Nonetheless, it is disappointing to note that one of the Sri Lankan companies had to withdraw itself from an exhibition that was held in a government managed facility — ‘Chennai Trade Centre’ as a result of the campaign of these pro LTTE groups.
Unless Tamil Nadu takes corrective measures at least in the area of restoring free movement of goods and services immediately, these anti Sri Lankan elements will establish themselves under the protective shield of TN resolution that was moved by the Chief Minister. Once the issue is blown out of proportion, into a situation which would prompt retaliation from Sri Lanka against India as a whole, it will not be an issue only for Jayalalitha or TN. The ultimate result would be, both countries will lose in terms of economic gains.
The recent statistics show that the allure of TN as an economic centre of Southern India is gradually diminishing over last few years. The average growth from 2005-2010 of the state has declined to 7.4%, which is below the national average of 8.7% and surprisingly well below the average growth of Gujarat (11.3%), Haryana (11%) and Bihar (9.6%). According to the reports, the two major industrial estates in Chennai – Guindy and Ambattur faced with power shortages, interest rate hikes and non-availability of labour,– have lost business worth over INRs. 1,000 crore, which were centres of excellence in auto component industry earlier. This was recently evident from the fact that the Ford company has finally decided to shift its INRs.5,000 crore vehicle assembly project to Gujrat after having positive discussion even with TN. Adding more chaos to the TN state economy, the Centre has not responded well to TN budget in August, which sought INRs.252,000 crore to fund state projects, including provision of a plethora of freebees promised by Jayalalitha during her election campaign. Out of the total funds requested from the Centre to bridge the state budget, they have received only the statutory share of INRs. 2,800 crore in return despite Jayalalitha’s repeated requests to the Centre, including the Prime Minister of India.
When it comes to economy, it’s all about managing your revenue and expenditure. The Chief Minister of TN was smart enough to raise the 4% VAT into 5%, increase state sales tax as well as widen the indirect tax base before her budget in August. This out-dated technique of political maneuvering of economic affairs has not been easily bitten by the TN businesses as well as her communist party alley. She (Chief Minister) is being heavily criticised by the TN textile industry, which is one of the backbone industries in the state for their inclusion into the tax base. The Textile industry in TN is crying for survival due to the recent hit of high raw material cost, interest costs and imposition of 10% central exercise duty for final apparel products. The Chief Minister’s move to include this sector into the tax circle has thrown the industry from the frying pan into the fire.
There is no doubt the Chief Minister of TN has to seek more and more tax collections to keep her state budget intact. It is simple economics that to collect tax, tax payers must earn revenues not losses. It is the Chief Minister’s and her state government’s responsibility to create a business friendly environment for their industries to prosper and thereafter take a part of their prosperity as tax. The resolution passed by TN against Sri Lanka and the subsequent incidents reported are a self defeating strategy for the TN government, as the move will result in the dwindling of revenue generating activities in TN.  For example, take the recent attacks in Chennai and the incidents in Velankanni, where the negative signals for tourists from Sri Lanka to TN is evident. It is an inevitable fact that there will be a curtailment of travel from Sri Lanka to TN resulting in heavy losses faced by airlines, hotels, hospitals, shops and street vendors etc., who make a good living out of Sri Lankan tourists. Tamil Nadu has to realise that tourists bound to Bodgaya or Velankanni cannot be expected to touch Chennai on an autonomous basis other than from Sri Lankan market.
On the other hand, TN has also to analyse in detail the current parity of trade between the Tamil Nadu State and Sri Lanka, where most of the benefits of current trade are filtered down to TN and her people.  Out of total export of US$ 2 bn from India, more than 50% is either directly exported from the state of TN or substantially value added by the people and industries in TN. For example, the textile industry in TN which is struggling for survival at this moment, has been immensely benefited by supplying the much needed raw material for the Sri Lankan industry. Disturbing this relationship will in no way help either the struggling textile industries in the TN textile valley or the Sri Lankan apparel industry.
If we consider the export product portfolio from India to Sri Lanka, the state of TN has been benefited directly or indirectly — be it Maruiti,  Alto, Tata Nano, TVS bikes or for that matter a single onion shipped from the Tuticorin port. The Sri Lankan market — which is bigger than the other Indian export markets such as Malaysia, Thailand, Russia, Canada, Australia, Egypt, Kenya, Switzerland, Sweden, Denmark, Philippines, New Zealand, etc.— plays a pivotal role in shaping the TN economy as well as Sri Lanka itself. Therefore, it is time for the TN Assembly to assess whether this the best strategy that the State could adopt to address the genuine interests of Tamil Nadu and Sri Lanka in a sustainable manner?