Shrinking fiscal space a major threat to TN growth: Economist

CHENNAI: With Tamil Nadu's public debt of nearly Rs 10 lakh crore dominating discussions following the release of the state government's White Paper, economist Dr Kalaiyarasan of the Madras Institute of Development Studies (MIDS) points out a deeper concern of a steady decline in own revenue generation, which could constrain investments in infrastructure, welfare and growth.

Presenting an analysis of the White Paper, Kalaiyarasan argued that the State's finances should not be judged by the size of its debt alone. "Debt is the outcome; the real issue is weakening revenue generation that pushes governments towards higher borrowings to meet committed expenditure," he said.

He identified six broad challenges: manageable debt relative to the economy's size; a sustained decline in own revenue generation; governance deficiencies explaining only part of the fiscal stress; shrinking fiscal autonomy under GST and the Centre-State framework; mounting liabilities in the power and transport sectors; and demographic and industrial shifts that could reshape the State's economy.

Kalaiyarasan said Tamil Nadu's own tax revenue has declined from around 8% of GSDP over the past decade to about 5.4%, despite continued economic growth, a trend that predates the present government and points to a structural issue. The GST leakages, undervaluation of properties affecting stamp duty, and weak tax administration explain only part of the decline, he said.

The bigger challenge, he argued, lies in changing the Centre-States fiscal relationship: Tamil Nadu now derives nearly 53% of its tax revenue through GST, limiting its ability to independently alter indirect tax rates, even as states shoulder the bulk of welfare and development spending.

On jobs, Kalaiyarasan said manufacturing is shifting towards capital-intensive sectors that generate fewer jobs than traditional industries, even as MSMEs continue to recover from the combined impact of demonetisation, GST and the pandemic.

Automation, AI and changing industrial patterns are slowing employment generation even as educational attainment rises, widening the gap between aspirations and available jobs, he said.

The White Paper also flags the State's debt-to-GSDP ratio at 28.3% in 2025-26, above the FRBM benchmark; mounting power and transport sector liabilities; and demographic shifts, including an ageing population, that could further strain finances, he said.

Without stronger revenue mobilisation and greater fiscal autonomy, he argued, sustaining Tamil Nadu's long-standing model of industrial growth alongside social welfare would become increasingly difficult.