By Sundar Ramanujam —

Chief Minister J. Jayalalitha of Tamil Nadu holding an AIADMK party election manifesto. Source: Wikimedia user Prakashfotos, used under a creative commons license.

When Tamil Nadu chief minister J. Jayalalithaa’s All-India Anna Dravida Munnetra Kazhagam party (AIADMK) won the 2016 Assembly Elections last month, she broke a 32-year pattern of anti-incumbency. While her successful re-election brings good news for the state in terms of stability, the overall implication of this victory for the economy and for development remains unclear. Tamil Nadu has made concrete progress in the last five years but has fallen short of its true potential due to Jayalalithaa’s emphasis on electoral gains over long-term investments. The energy sector is a case in point: the state power distribution company (discom) is laden with debt amidst campaign promises of more free electricity.

Despite Jayalalithaa’s mixed reputation, Tamil Nadu has performed surprisingly well under her government — both when compared to the previous government of the Dravida Munnetra Kazhagam (DMK) and to top performers like the state of Gujarat.

Source: Wadhwani Chair compilation of data from NITI Aayog’s State Statistics – gross state domestic product (GSDP) at constant (2004-05) prices, percent growth (2004-05 to 2014-15).

Notwithstanding her reputation for engaging in state patronage and clientelism, Jayalalithaa did better at reining in the state’s budget deficit than her predecessors in the DMK. Under her watch, Tamil Nadu’s government kept its budget deficit to an average of 2.64 percent of gross state domestic product (GSDP) — well within the 3 percent target set by the national Fiscal Budget Responsibility Act — over a period of 4 years despite fact that the DMK government left office with a deficit of 3.1 percent. Gujarat, however, performed better, with an average deficit of 2.2 percent of GSDP over the same period.

Source: Wadhwani Chair compilation of data from Tamil Nadu Assembly’s Annual Budget Speeches from fiscal year 2006-07 to fiscal year 2015-16.

Jayalalithaa was also successful in increasing revenue, while the DMK’s record was far more mixed. Between 2006-2010, under the DMK government, the growth in state revenue averaged close to 13 percent, including an outright contraction in the 2009-10 fiscal year. During the first four years of the Jayalalithaa government (the only years for which data are available), revenue grew more consistently and more quickly, averaging above 15 percent.

Source: Wadhwani Chair compilation of data from Comptroller and Auditor General (CAG) of India’s Audit Reports of States from fiscal year 2006-07 to fiscal year 2015-16.

With the exception of fiscal year 2012-13, when a state-wide drought created a setback for the state economy, Tamil Nadu grew faster than India as a whole during most years of Jayalalithaa’s previous term. Tamil Nadu has still trailed top-performing states like Gujarat, however.

Chief Minister Jayalalithaa’s government performed well on a wide variety of indicators. But, because her government’s policies are aimed at supporting populistic linkages with the voters, Tamil Nadu’s performance falls short of expectations. According to a recent report from World Bank that assesses business reforms in states, Tamil Nadu falls behind the best performing states in terms of reform implementation. Nowhere is Jayalalithaa’s focus on short-term gains over long-term investment more clear than in the fate of Tamil Nadu’s power sector under her watch. While Jayalalithaa managed to resolve the problem of power capacity, it came at the cost of an additional $11 billion of debt.

By some measures, Jayalalithaa’s performance in the electricity sector is impressive: her government added over 9000 megawatts (MW) in total installed capacity between 2011 and 2016, with thermal power capacity increasing by over 80 percent. Tamil Nadu increased its installed capacity of renewable energy by nearly 50 percent during the same time period, adding 4200 MW of renewable power.

But at the same time the debt of Tamil Nadu’s state-run power distribution company (discom), the Tamil Nadu Generation and Distribution Corporation (TANGEDCO) more than doubled during Jayalalithaa’s term, from $8.4 billion to $19.1 billion. TANGEDCO is now the third most debt-ridden discom in India. This is not primarily due to a fraying grid: average technical and commercial (AT&C) losses for Tamil Nadu, in fact, stayed below 20 percent. Gujarat’s AT&C losses, in contrast, were above 25 percent, yet Gujarat has still managed to turn a profit from electricity generation.

The biggest issue is the inefficient government decisions that result in expensive power purchases from private players. For example, in June 2015 the state government signed a 25-year deal with Adani Group to buy solar power at $0.10 (INR 7.01) per unit. The deal came just days after the same company quoted a price of $0.09 (INR 6.04) per unit to the Madhya Pradesh government. The deal illustrates that Jayalalithaa needs to do more when it comes to good governance – particularly in this sector. The problem is compounded by Jayalalithaa’s propensity to offer consumers discounts and subsidies. This tendency appeared most recently in her electoral promise to give every household 100 units of free electricity and commercial establishments as much as 750 units of free electricity. This kind of patronage adds $200 million to costs of TANGEDCO.

The contrast between Tamil Nadu’s overall fiscal health and the crisis in its discom suggests that Jayalalithaa has been taking advantage of the liminal status of discom debt (neither fully private nor fully state-owned) to offer subsidies to the popular class while respecting the 3 percent debt limit. This behavior reinforces the argument that Jaya’s populist tendencies discourage her from pursuing sustainable policies with long-term objectives.

There remains the hope that, given the anti-incumbency phenomena that gripped Tamil Nadu for the last three decades, Chief Minister Jayalalithaa’s recent success in maintaining political stability in the state could give her the confidence needed to push through serious reforms aimed at attracting businesses and developing the state, beginning with reforms in the power sector.

Mr. Sundar Ramanujam is a researcher with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.