Fiscal balance: TN Finances: Debt myth vs growth reality

The White Paper on Tamil Nadu's public finances, released ahead of the upcoming State Budget, has generated considerable public debate. Its central message is unambiguous: the State's debt has risen sharply, revenue deficits persist, interest payments are increasing, and fiscal pressures are mounting. These are legitimate concerns that deserve public attention. Yet, they represent only one side of the story. Public finance cannot be evaluated through debt and deficit figures alone. It must be judged in relation to economic growth, developmental outcomes, and the changing nature of India's fiscal federalism.

The White Paper deserves credit for placing the State's finances under public scrutiny. Fiscal transparency is always desirable. However, its analytical framework remains incomplete because it treats Tamil Nadu's fiscal position largely in isolation from the broader economic and institutional environment.

To begin with, the White Paper is right in drawing attention to three important challenges. First, Tamil Nadu continues to incur a revenue deficit, meaning current expenditure is partly financed through borrowing. Second, rising interest payments reduce the fiscal space available for investment in infrastructure and public services. Third, a demographic transition toward an ageing population will place growing pressure on public expenditure for healthcare and pensions. These issues warrant careful policy attention and underscore the importance of fiscal prudence.

But acknowledging these challenges does not justify the conclusion that Tamil Nadu's fiscal stress stems primarily from state-level policy failures. Such an interpretation overlooks two critical dimensions.

The first is the State's economic performance. During the period under review, Tamil Nadu's Gross State Domestic Product (GSDP) nearly doubled despite the pandemic, global inflation, and recurring natural disasters. The White Paper repeatedly highlights that public debt has almost doubled, but gives far less emphasis to the fact that the State's economy has expanded proportionally, supported by double-digit growth.

This distinction is fundamental. Fiscal sustainability is determined not by the absolute size of debt, but by its relationship to the economy's capacity to generate income and service that debt. This is precisely why the FRBM framework evaluates debt and deficits as a proportion of GSDP rather than in absolute rupee terms. Headline debt figures may attract public attention, but they do not, by themselves, indicate whether public finances are unsustainable.

Moreover, borrowing is not inherently undesirable. Governments borrow to finance infrastructure, schools, hospitals, and transport systems that generate long-term economic and social returns. The appropriate question is whether borrowing has remained within prudent limits and contributed to economic growth.

The second omission concerns India's evolving fiscal federal architecture. Over the past decade, the fiscal relationship between the Union and the States has undergone structural change. The introduction of the Goods and Services Tax (GST) substantially reduced the taxation autonomy of states, shifting critical rate decisions to the GST Council.

Furthermore, the original GST compensation mechanism has ended. Concurrently, the Union Government has increasingly relied on cesses and surcharges, asset monetisation, and dividends from the RBI and PSUs — revenues that lie outside the divisible pool and are not shared with the states. This shift has altered the fiscal landscape for virtually every state.

Tamil Nadu's experience reflects this structural change. Its own tax and non-tax revenues have grown steadily over the past five years, demonstrating robust revenue mobilisation. By contrast, transfers from the Union Government have grown much more slowly, while grants have declined. More importantly, Union transfers as a share of the State's GSDP have fallen significantly during the period under review.

This is a crucial part of the fiscal story. States today are expected to provide better healthcare, education, infrastructure, and social protection while operating within a progressively shrinking fiscal space. The challenge they face is not simply one of expenditure control, but of financing expanding developmental responsibilities with fewer untied resources.

The White Paper also relies heavily on comparisons with a small group of economically advanced states. Such comparisons should be treated with caution, as states differ widely in their economic structures, demographic profiles, and revenue capacities. Recent reports from the CAG and the RBI indicate that higher fiscal deficits have become a broader feature of state finances, driven mostly by declining transfers from the Union. Tamil Nadu is confronting a structural challenge that extends well beyond its own boundaries.

Equally important, fiscal indicators must be interpreted alongside developmental outcomes. Tamil Nadu consistently ranks among India's leading states in industrialisation, healthcare, education, and social welfare. These achievements are the cumulative result of sustained public investment over several decades. Assessing fiscal performance without considering the quality and outcomes of public expenditure presents an incomplete picture.

The real issue, therefore, is debt sustainability rather than debt magnitude. The relevant questions are whether debt is growing faster than the economy, whether interest obligations remain manageable, and whether fiscal indicators remain consistent with FRBM limits. Tamil Nadu continues to borrow within ceilings approved under this institutional framework. Headline debt numbers alone provide an insufficient basis for judging fiscal health.

Ultimately, this debate raises larger questions about the future of Indian fiscal federalism. As states shoulder increasing responsibilities for development and welfare, their fiscal autonomy has narrowed through the declining role of untied transfers and the growing importance of centrally controlled revenues.

A balanced assessment of Tamil Nadu's finances requires a broader political economy perspective — one that recognises the interaction between growth, social development, and evolving Union-State fiscal relations. The more important question is whether a state that contributes significantly to national growth is receiving a fair share of national resources, and whether India's fiscal architecture provides states with the autonomy and resources necessary to fulfil the developmental aspirations of their citizens.

Jothi Sivagnanam is a former member of the TNPSC