Tamil Nadu Debt Sustainability: A Deep Dive into Fiscal Health and Growth

Salem DharanidharanAs the assembly election approaches, Tamil Nadu’s public debt of Rs 9.5 lakh crore has become a contentious issue, pulled into political debates most of which have fixated on absolute debt figures.But absolute debt paints a distorted picture of a state’s financial health, which is better measured through its debt-to-GDP ratio, fiscal deficit, revenue strength and growth. And viewed from that lens, Tamil Nadu’s finances are far more stable.There is a correlation between a country’s absolute debt and its GDP. The top 10 countries by absolute gross govt debt in 2025 are also the top 10 countries by absolute GDP, with the USA and China topping the charts. The GDP of nearly every country will increase each year, and so will its overall debt. So debt can only be measured in terms of GDP, revenue, growth rate, and long-term future growth rate. If one considers Tamil Nadu’s debt-to-GDP ratio, it went from 16.5% in 2011 to 28.3% in the 2021-2022 budget and has since stabilised at 26%. To curtail high govt borrowing, Parliament passed the FRBM Act in July 2004, under which states require the Union govt’s consent for market borrowing if they have outstanding loans from the Centre.The FRBM Act requires the govt to limit the fiscal deficit (the difference between total revenue and total expenditure of a govt in a financial year) to 3% of GDP, with a 0.5% relaxation. States are allowed to borrow as long as the FD% in terms of GSDP is less than 3.5%.The state’s fiscal deficit, which touched 4.3% in 2016-2017, has been in continuous decline since 2021 and is expected to reach 3% in 2025-2026, well within the FRBM limit. It is also better than more than 60% of states, allowing it to borrow more easily.Although the borrowing interest rate in most states has increased, Tamil Nadu’s borrowing rate has remained among the lowest. In the 10-year benchmark govt bond yields report, Tamil Nadu’s remain the highest, underlining strong market credibility and sentiments, putting to rest political pessimism expressed by opposition parties. The debt-to-GDP ratio is also not the perfect marker of a state/country’s financial health. A high debt (Japan’s, for example, is more than 250%; Canada’s is 110%; France’s is 101%) doesn’t always mean poor health if the economy grows faster than interest costs or if borrowed funds are productive investments. Conversely, low debt can mask issues if revenues are weak or spending is inefficient.Tamil Nadu, historically, has invested in welfare measures focused on growth fundamentals, such as democratising education and promoting industrial investment across districts, and its growth rate remains high. In comparison to the rest of India, Tamil Nadu’s per capita GDP (average income per person) and overall GDP have increased exponentially over the past 20 years, surpassing the Indian average.From 2005-2006 to 2011-2012, TN grew at 10.3%, while India grew at 8.2%; from 2012-2013 to 2021-2022, TN was at 6.2% vs India’s 5.7% and from 2022 onwards, Tamil Nadu’s growth rate has been nearly 80% higher than the rest of the country. For example, TN’s 2024-2025 growth of 11.2% exceeded India’s 6.5%.A major factor driving growth is human capital. By democratising education through free mid-day meal schemes, bus passes, and targeted scholarships, people of all castes and genders are more employable and have a higher capacity than in the rest of India. One in four dalit entrepreneurs lives in Tamil Nadu. The state has the largest female workforce in India, and 66% of women factory workers are in Tamil Nadu.Tamil Nadu’s welfare schemes illustrate how it can sustain a higher growth rate in the long run. Examples include the data-backed Moovalur Ramamirtham Ammaiyar Higher Education Assurance Scheme, under which Rs 1,000 was announced to enhance the GER of govt school girls joining college. The scheme nearly doubled the GER of govt schoolgirls joining college, translating into an additional 15% of women being eligible for employment, doubling families’ disposable income, and thereby contributing more to Tamil Nadu’s GDP and tax revenue. A family with a graduate female member is expected to spend more on their children’s overall education and nutrition. The schemes are investments that yield dignity, productivity, and long-term economic dividends.Coupled with such welfare schemes, Tamil Nadu’s strong emphasis on industrial growth has led to greater employment generation. The state ranks first in electronics component manufacturing, and nearly 80% of the districts are involved in global IT export. All this has led to Tamil Nadu’s GSDP and revenue growing faster than expected, negating fears of financial mismanagement.Over the past five years, Tamil Nadu’s share of central taxes (tax devolution from the Union govt) has risen from ₹29,000cr to ₹50,000cr, an increase of just ₹21,000cr. In contrast, transfers to Uttar Pradesh have surged from ₹1.2 lakh crore to ₹2.55 lakh crore, representing a massive jump of ₹1.35 lakh crore. A similar trend is evident in grants-in-aid: In 2017, Tamil Nadu received ₹14,679cr, compared to ₹23,354cr more recently, while Uttar Pradesh’s grants have risen sharply from ₹40,648cr to ₹1.10 lakh crore. This occurs even as Tamil Nadu’s contribution to Union taxes during the same period has grown more significantly than Uttar Pradesh’s. All this has enabled states such as UP to get an additional Rs 1 lakh crore in grant allocation from the Centre every year.Of TN’s overall revenue, 75% comes from state tax revenue, compared to UP, which derives only 50% from its own taxes.Measured against growth, revenues and fiscal rules, Tamil Nadu’s debt trajectory remains sustainable.(The writer is national spokesperson of the DMK)