The White Paper and the Reality of Tamil Nadu's Public Finances Beyond Debt and Deficits

The White Paper on Tamil Nadu's public finances, released last month, has generated considerable public debate as the State prepares to present its Budget. The report paints a picture of mounting fiscal stress, highlighting rising debt, persistent revenue deficits, increasing interest payments and growing contingent liabilities. Its central conclusion is that Tamil Nadu's fiscal position has deteriorated significantly during the period 2021-22 to 2025-26 and that urgent corrective action is required.

The White Paper deserves credit for bringing public attention to the state's fiscal condition and for compiling a large body of fiscal data in one place. Nevertheless, its analytical framework is incomplete. Public finance is not merely about revenue, expenditure, deficits and debt. These variables are instruments through which governments pursue economic growth, social development and public welfare. Fiscal indicators acquire meaning only when viewed alongside economic performance and developmental outcomes.

A balanced assessment must therefore ask not only whether debt and deficits have increased, but also why they have increased, what outcomes have been achieved, and how changes in India's fiscal federal architecture have affected the finances of states such as Tamil Nadu.

Genuine Concerns That Cannot be Ignored

The White Paper is correct in drawing attention to three important concerns.

First, Tamil Nadu continues to run a revenue deficit. In principle, governments should borrow primarily for creating assets rather than financing current expenditure. Persistent revenue deficits imply that a part of current expenditure is being financed through borrowing, which deserves attention.

Second, interest payments have been increasing steadily. Rising debt-servicing obligations reduce the fiscal space available for infrastructure, education, health and social welfare.

Third, Tamil Nadu's demographic transition presents a long-term fiscal challenge. With declining fertility and increasing longevity, expenditure on healthcare, pensions and elderly welfare is likely to rise substantially over the coming decades.

These are real concerns. However, acknowledging them does not automatically validate the broader conclusion that Tamil Nadu's fiscal stress is primarily the consequence of state-level policy failures.

The Missing Economic Performance

The most striking omission in the White Paper is its silence on the economic performance of the state.

During the period under review, Tamil Nadu's Gross State Domestic Product increased from about Rs 20.7 lakh crore in 2021-22 to more than Rs 40.6 lakh crore in 2026-27. The economy almost doubled in size despite the lingering effects of the COVID-19 pandemic, global inflationary pressures, supply-chain disruptions and repeated natural disasters.

The White Paper repeatedly emphasises that state debt has nearly doubled. What it does not equally emphasise is that the state's economy has also nearly doubled.

This distinction is critical. Fiscal sustainability depends not on the absolute magnitude of debt but on the relationship between debt and the size of the economy. This is precisely why the Fiscal Responsibility and Budget Management framework measures debt and deficits relative to GDP or GSDP rather than in absolute rupee terms.

The repeated emphasis on debt crossing Rs 10 lakh crore may be politically attractive, but it is analytically less meaningful than examining debt sustainability.

An interesting feature of the Paper is the relative absence of state’s recent double digit growth performance from its analytical framework. This omission is noteworthy because the State Government itself has highlighted Tamil Nadu's strong economic performance in national forums. At the recent meetings of the NITI Aayog, Chief Minister Joseph Vijay pointed to the state's double-digit growth and its increasing contribution to national output.

If economic growth is regarded as evidence of successful governance in one context, it should also form an integral part of any assessment of fiscal performance. Public finance cannot be evaluated independently of the growth outcomes it generates.

Fiscal Federalism: The Missing Dimension

The most important weakness of the White Paper is its inadequate treatment of fiscal federalism.

The fiscal conditions of Indian states has fundamentally changed after the introduction of GST. While GST collections are shown as part of states own tax revenues, states no longer possess meaningful autonomy over tax rates and structures. Their most important source of indirect taxation is now effectively governed through the GST Council.

The GST framework was introduced with a guarantee that states would receive compensation if revenue growth fell below 14 per cent annually. In practice, GST growth remained substantially below this benchmark, and compensation payments were eventually discontinued.

Simultaneously, the Union government has increasingly relied upon cesses and surcharges, revenues that lie outside the divisible pool like monetisation of PSUs, dividends of PSUs, RBI and now SEBI and are therefore not shared with states. The growing importance of non-divisible revenues, together with the withdrawal of GST compensation, has altered the fiscal position of virtually all states.

The White Paper acknowledges some of these developments but does not adequately incorporate them into its explanation of Tamil Nadu's fiscal stress.

The consequences of this shrinking fiscal space are becoming increasingly evident. The State Government faces growing pressure to accommodate new developmental commitments, welfare programmes and electoral promises within an already constrained fiscal framework. Several of these commitments involve substantial expenditure obligations. It is therefore understandable that policymakers have become increasingly cautious regarding the announcement of new schemes.

In this context, the observation made by the Finance Minister Marie Wilson that any significant new scheme would require additional borrowing is particularly revealing.

Rather than being viewed merely as a justification for fiscal restraint, the statement points to a deeper structural problem: states are finding it increasingly difficult to finance new commitments from their existing revenue streams. The question therefore is not simply why debt has increased, but why the fiscal space available to states has narrowed despite robust economic growth. The answer lies partly in the changing architecture of Centre-State fiscal relations over the last decade.

The Evidence from Union Transfers

Within such general shrinking fiscal space of states, Tamil Nadu suffers more so due to its better performance both on the economic and demographic front. The most revealing aspect of its recent fiscal history is not the growth of debt but the decline in Union transfers relative to the state's economy.

Between 2021-22 and 2026-27:

The contrast is striking. Tamil Nadu's own revenue increased from Rs 1.35 lakh crore to Rs 2.57 lakh crore over the period. Tax revenue grew by over 13 per cent annually, while non-tax revenue expanded even faster.

By contrast, Union transfers grew by only 3.8 per cent annually. More importantly, Union grants declined at an annual rate of 6.7 per cent.

The relative decline is even more significant. Union transfers fell from 3.5 per cent of GSDP in 2021-22 to just 2.15 per cent in 2026-27, one third decline. Grants declined from 1.69 per cent of GSDP to only 0.61 per cent, a two third decline.

The evidence therefore points towards a structural shift in Indian fiscal federalism as shown below. Tamil Nadu's own revenue effort has remained robust. What has declined is the contribution of Union transfers to the state's fiscal resources. Hence, the fiscal challenge is not increasing debt but shrinking federals transfers.

Any explanation of Tamil Nadu's fiscal position that ignores this transformation is necessarily incomplete.

Selective Comparisons and Developmental Outcomes

The White Paper repeatedly compares Tamil Nadu with a small group of states such as Gujarat, Karnataka and Maharashtra. The recent CAG report on state finances released on 16.6.2026 states that 18 of India’s 28 states including Gujarat, Karnataka and Maharashtra overshoot their fiscal deficit ceiling of 3 % of GSDP in 2024-25.

In the same year all “states’ consolidated fiscal deficit increased to 3.3 % of GSDP after remaining below 3.0 percent during the previous three years”, and “the consolidated debt of states declined to 28.1 percent of GDP at end-March from a peak of 31 per cent at end -March 2021” according to the latest RBI’s “State Finances: A study of Budgets”. The report adds that “The rise in fiscal deficit in 2024-25 was driven primarily by lower revenue receipts largely attributed to lower grants from the Centre.

Notwithstanding, the consolidated GFD-GDP ratio continued to remain within the Centre’s prescribed ceiling of 3.5 per cent (including 0.5 per cent linked to power sector reform). Sustained higher capital expenditure strengthens the quality of fiscal adjustment and augurs well for medium-term growth”.

Given such general fiscal stance of all states together, the white paper’s selective comparisons are misleading. Besides, States differ substantially in their economic structures, tax bases, demographic profiles and social welfare commitments.

More importantly, fiscal indicators should not be analysed independently of developmental outcomes.

Tamil Nadu consistently performs among the leading states not only in GSDP growth but also in indicators such as life expectancy, maternal health, educational attainment, industrial employment and social welfare. These outcomes are themselves the product of sustained public expenditure.

Fiscal analysis must therefore examine not only how much a government spends but also what it achieves through that spending.

Debt Sustainability, Not Debt Magnitude

The White Paper's repeated emphasis on debt in absolute terms obscures the more important question of sustainability.

The relevant questions are:

• Is debt growing faster than the economy?

• Can interest obligations be serviced?

• Does borrowing support growth and welfare?

• Is debt consistent with Finance Commission norms?

Tamil Nadu remains subject to borrowing limits prescribed under the FRBM framework and monitored through Finance Commission recommendations and Union government approvals.

The State cannot borrow without limit even if it wishes to do so, as acknowledged by the Finance Secretary during the press interaction.

Consequently, the relevant question is not whether debt has increased, but whether it remains manageable within the State's fiscal capacity. As long as debt and deficits remain within the limits prescribed under the fiscal responsibility framework and are supported by sustained economic growth and revenue generation, headline debt numbers by themselves provide only a partial picture of fiscal health.

Broader Question of Federalism

The continuous shrinking of Union transfers raises a larger constitutional question. Over successive Finance Commissions, Tamil Nadu's share in Union tax devolution has steadily declined. At the same time, the increasing use of cesses, surcharges and discretionary transfers has reduced the importance of formula-based transfers.

This trend has implications extending beyond Tamil Nadu. It affects the nature of Indian federalism itself.

States are increasingly expected to shoulder responsibilities relating to health, education, welfare and infrastructure while operating within a shrinking fiscal space. The resulting fiscal pressures should therefore be understood not merely as state-level phenomena but as consequences of broader institutional changes.

Conclusions

The White Paper performs a useful public function by highlighting concerns relating to debt, deficits and fiscal sustainability. However, its analytical framework remains incomplete because it largely treats Tamil Nadu as an isolated fiscal entity. The state's fiscal position can only be understood in the context of three simultaneous developments: strong economic growth, extensive social and developmental commitments, and a steadily changing system of fiscal federalism that has reduced the relative importance of Union transfers.

The real challenge before Tamil Nadu is not simply fiscal consolidation. It is sustaining high economic growth, maintaining its achievements in human development and social welfare, and preserving adequate fiscal space within an increasingly centralised federal system. Any evaluation of the state's finances that ignores this broader political economy context risks mistaking the symptoms for the cause.

The debate, therefore, should not be confined to whether debt has crossed a particular numerical threshold. The more important question is whether a state that contributes significantly to national growth and development is receiving a fair and adequate share of national resources, and whether India's evolving fiscal architecture is providing states with the autonomy and resources necessary to fulfil the developmental aspirations of their citizens.

(The writer is former Member (Full-Time), Tamil Nadu State Planning Commission and former Professor of Economics, University of Madras.)