Ahead of Tamil Nadu Budget, why Vijay govt’s White Paper rings fiscal alarm bells

Many of the concerns flagged by the White Paper – from growing outstanding liabilities and declining revenues to rising interest payments crowding out developmental and capital expenditure – plague several states across the country. But with the TVK coming to power on the back of significant campaign promises, the White Paper appears to give the new government some leeway in implementing schemes that would require significant financial outlays.

During the Tamil Nadu elections, the TVK’s poll promises had ranged from monthly financial assistance to women, youth and farmers to increases in pensions and remunerations to government workers beyond the existing outlays.

The White Paper, using Budget and other publicly available data, shows that Tamil Nadu has high debts, large committed expenditures and shrinking revenues, leaving little room to implement new schemes and fund capital expenditure.

Debt crisis

While accounting for the economic shock during the Covid-19 pandemic, the White Paper said that Tamil Nadu’s debt-to-GDP ratio only grew while other comparable states saw a decline or stabilisation.

“Outstanding liabilities have grown at a CAGR of 14.3% over the five post-Covid years – still faster than nominal GDP growth in most years of the window,” the report stated. “The debt added in these five years alone represents a larger absolute quantum than the entire debt stock the state had accumulated in its first six decades of existence.”

In 2020-21, Tamil Nadu’s outstanding liabilities stood at Rs 5.13 lakh crore, accounting for 28.7% of the state’s GDP. By 2025-26, revised estimates put the debt at Rs 10 lakh crore or 28.3% of the state’s GDP. The 2026-27 Interim Budget placed the outstanding liabilities at Rs 10.72 lakh crore or 26.12% of the state’s GDP.

Tamil Nadu’s outstanding liabilities

Comparing Tamil Nadu’s debt position to other large, industrialised states, the White Paper found that Maharashtra had a marginally higher outstanding liabilities in 2025-26 at Rs 10.03 lakh crore, while Karnataka and Gujarat were lower at Rs 7.68 lakh crore and Rs 5.25 lakh crore, respectively. But at a per capita level, Tamil Nadu has by far the largest debts, at Rs 1.29 lakh compared to Rs 1.11 lakh for Karnataka, Rs 77,569 for Maharashtra and Rs 70,798 for Gujarat.

Data published by the RBI shows that between 2008 and 2020, Tamil Nadu’s debt under the previous AIADMK and DMK governments was consistently below the national average, only crossing the all-India average in 2021. The RBI’s calculations show that in 2025-26, as per Budget estimates, the debt-to-GDP ratio of Tamil Nadu and the national average both stood at 29.2% and as many as 18 states exceeded the all-India figure – with states like Punjab as high as 46.4%. But large states like Karnataka, Maharashtra and Gujarat remained below the national average in 2025-26.

A major contributor to the rising outstanding liabilities are loss-making public enterprises, particularly the power sector, which alone accounted for 14%, or Rs 1.42 lakh crore, of all government debts as of March 2026.

‘Debt-interest spiral’

Flagging the interest payments on Tamil Nadu’s rising debts, the White Paper says the state is now entering a “debt-interest spiral” – describing the need to finance debt repayments through further borrowing.

“The rising interest bill becomes itself a reason to borrow further because the state must finance the interest payment from somewhere, and if revenue receipts are insufficient, additional borrowing fills the gap,” the report states. “Unlike a scheme outlay that can be deferred, or a capital project that can be phased, or a salary increment that can be moderated, interest on outstanding debt must be paid in full and on time.”

The White Paper notes that almost a quarter of Tamil Nadu’s revenue receipts is committed to interest payments before any other allocations. From Rs 41,564 crore (or 20.03% of total revenue receipts) in 2021-22, interest payments are expected to rise to Rs 78,677 crore (or 22.83%) in 2026-27 as per the Interim Budget’s estimates. By 2028-29, the Interim Budget projects interest payments to cross Rs 1 lakh crore, accounting for 23.54% of total revenue receipts.

Tamil Nadu’s interest payments

Tamil Nadu’s interest payments far outstrip major states, including Maharashtra, where interest payments account for 10.3% of the state’s revenue. Comparable figures from 2025-26 show that in absolute terms, no state has more annual interest payments than Tamil Nadu.

The White Paper’s assessment of interest payments also shows the limits of the state’s own capacity to generate revenues through taxes. More than a third of every rupee raised through Tamil Nadu’s own taxation efforts goes towards annual interest payments.

In particular, the report says interest payments now significantly exceed capital expenditure – which is used to create new assets including public infrastructure. In the 2026-27 Interim Budget, capital outlay fell short of interest payments by more than Rs 19,000 crore. As per the 2025-26 revised Budget estimates, this gap was Rs 17,700 crore. The last time capital expenditure exceeded interest payments was in 2016-17, prior to which Tamil Nadu’s capital expenditure had exceeded interest payments for five consecutive years.

Interest payments aren’t the only inflexible expenses. Tamil Nadu’s committed expenditure – which includes salaries and pensions for government employees besides interest payments – stood at Rs 1.25 lakh crore in 2021-22, accounting for 60.4% of the total revenue receipts. By 2025-26, this figure had risen to Rs 1.89 lakh crore, or 64.4% of all revenues. In contrast, the committed expenditure in each of Karnataka, Gujarat and Maharashtra is below 50% of total revenues.

Shrinking revenue

Underlying the growing debts and interest payments is the state’s inability to generate revenues, says the White Paper.

The state’s total revenue receipts as a share of its GDP has consistently declined in recent years – from 10.01% in 2021-22 to 8.32% in 2025-26. The revenue-to-GDP ratio is an indicator of fiscal capacity and the ability to fund expenditures without taking on debt. On this front, Tamil Nadu is the worst performer among major states like Maharashtra, Gujarat and Karnataka despite being ahead of these states until a few years ago.

Though Tamil Nadu has seen its own tax revenue rise from Rs 1.23 lakh crore in 2021-22 to Rs 1.93 lakh crore in 2025-26, its share of the state GDP has shrunk from 5.93% to 5.45% – an indication of the state’s declining fiscal independence. However, on this front, while Tamil Nadu is ahead of Gujarat at 5.19%, it trails Maharashtra at 8.03% and Karnataka at 5.89%.

Tamil Nadu’s revenues

The White Paper also lays part of the blame on the Centre over declining devolution of funds. In 1995, the 10th Finance Commission awarded Tamil Nadu a 6.64% share in central taxes. This figure has declined to 4.097% in the latest 16th Finance Commission for a reduction of 38% over the last three decades.

“For a state that contributes more than 9% of the national economy and has a population of more than 6% of the country, a meagre 4% share in tax devolution is found to be wanting,” notes the White Paper.

As a result, Tamil Nadu has the country’s second-highest revenue deficit – the gap between revenue receipts and expenditures – forcing the state to incur more debts. In 2004, though the Tamil Nadu Fiscal Responsibility Act (TNFRA) set a target of zero revenue deficits, the deadline for this has been revised eight times, most recently to 2026-27.

“Tamil Nadu’s revenue deficit is structural. It has been present in every year since 2013-14 and has remained through recoveries, expansions, and the post-Covid rebound. The structural character arises from the simultaneous movement of the two sides of the revenue account – a hardening expenditure side and a weakening revenue side,” the White Paper states.