budget activities and other hidden and contingent liabilities into the multiyear adjustment framework. Off-budget borrowing serviced by the state government, which constituted 2 percent of GDP in 2002/03, was integrated with the state’s public debt.<sup>22</sup> Capital works executed in Public Account but financed by off-budget borrowings deposited in the Public Account were fully integrated within the fiscal framework. Comprehensive and robust estimation of accrued pension liabilities and emerging cash flow needs based on the inherent demographics of the workforce replaced the incremental cash budgeting.<sup>23</sup> Finally, the accounts of the state power utility were consolidated with the fiscal account, given the significant amount of the utility’s implicit liabilities.

**Table 2. Primary, Revenue, Fiscal and Consolidated Deficits as a Percent of GSDP**

||1997/98|1998/99|1999/00|2000/01*|2001/02*|2002/03*|
|---|---|---|---|---|---|---|
|Primary Balance|-0.6%|-2.3%|-2.5%|-1.8%|-1.1%|-1.9%|
|Revenue Deficit|1.1%|2.6%|2.8%|2.1%|1.7%|3.0%|
|Non Power Deficit (1)|1.4%|4.0%|5.1%|4.1%|3.2%|3.1%|
|Budgetary Support to Power (2)|0.9%|0.2%|-0.4%|-0.1%|0.2%|1.4%|
|Budgetary Fiscal Deficit (1+2)|2.3%|4.1%|4.6%|4.0%|3.5%|4.5%|
|Power Sector Financing Requirement (3)|0.8%|1.2%|1.6%|1.7%|2.0%|1.7%|
|Consolidated Fiscal Deficit (1+3)|2.2%|5.2%|6.7%|5.8%(a)|5.2%(a)|4.8%(a)|
||2003/04*|2004/05|2005/06**|2006/07**|2007/08**|2008/09**|
|Primary Balance|0.3%|-0.3%|-0.5%|-0.1%|0.5%|0.8%|
|Revenue Deficit|0.9%|0.9%|0.7%|0.6%|0.3%|0.0%|
|Non Power Deficit (1)|2.1%|2.5%|2.5%|2.5%|2.2%|1.9%|
|Budgetary Support to Power (2)|0.3%|0.6%|0.5%|0.1%|0.1%|0.0%|
|Budgetary Fiscal Deficit (1+2)|2.4%|2.9%|3.0%|2.6%|2.3%|1.9%|
|Power Sector Financing Requirement (3)|1.1%|1.2%|1.5%|0.6%|0.2%|0.1%|
|Consolidated Fiscal Deficit (1+3)|3.3%|3.7%|4.0%|3.1%|2.4%|2.0%|

Source: The government of Tamil Nadu MTFP (September, 2005).

* The deficits in 2000/01 and 2001/02 underestimate the actual levels because they do not account for non-pension arrears equaling 1.7 percent of GSDP in 2000/01 and 2 percent of GSDP in 2001/02.  The deficits in 2002/03 and 2003/04 include partial clearance of Rs.30.62 billion in payment arrears accumulated from the late 1990s.

** Indicates projections.

Data for 2002/03 include clearance of arrears equal to 2 percent of GSDP. Deficits for 2003/04, 2004/05, and 2005/06 include clearance of pension arrears from 1999/00.

On the expenditure side, efforts were made at controlling the growth of pensions and wages, reducing major subsidy programs and improving their targeting. Figure 9 summarizes annual growth of key expenditure components for three distinct periods: precrisis, crisis period, and reform period. As the figure shows the reform efforts resulted in a slowdown of growth in pensions, subsidy, salaries and interest expenditure whereas

> 22 The ratio was small relative to that of other states. However, this practice increased the transparency of the budget and ensured that any future growth in these types of borrowing will be monitored closely. 23 The authors were part of the World Bank team that worked with the state government to incorporate offbudget liabilities into the fiscal framework.

16