Opposition parties, particularly the BJP, have often sensationalised Tamil Nadu’s rising debt, highlighting that it is approaching ₹9 lakh crore and claiming that this equates to every household in the state now ‘bearing a debt burden of ₹3 lakh each.’
Published Mar 13, 2025 | 12:14 PM ⚊ Updated Mar 13, 2025 | 12:35 PM
Synopsis: Tamil Nadu’s rising debt has become a focal point of political debate ahead of the state’s 2025-26 budget, with opposition parties, particularly the BJP, alleging that the DMK government is driving the state into an unsustainable financial crisis. However, an analysis of official data reveals that Tamil Nadu’s debt-to-GSDP ratio remains within the limits set by the 15th Finance Commission, despite the Union Government’s shrinking tax devolution and increasing financial centralisation, which have constrained the state’s revenue sources.
With Tamil Nadu Finance Minister Thangam Thennarasu set to present the state’s 2025-26 budget on 14 March, discussions around the state’s financial health have intensified.
At the heart of the debate is Tamil Nadu’s debt burden, with the opposition – particularly Bharatiya Janata Party (BJP) leaders – accusing the Dravida Munnetra Kazhagam (DMK) government of pushing the state into an unsustainable fiscal crisis.
But is Tamil Nadu truly overburdened by debt? Has borrowing spiralled out of control, or is it part of a broader economic framework? How should a state’s debt be measured in a meaningful way? South First examines the facts beyond the rhetoric.
According to figures from the 2024-25 Tamil Nadu budget, the state’s total debt was reported at ₹8,33,361.80 crore, constituting 26.41 percent of the Gross State Domestic Product (GSDP) in 2024-25. This is expected to decline slightly to 25.75 percent of GSDP in 2025-26.
Opposition parties, particularly the BJP, have often sensationalised Tamil Nadu’s rising debt, highlighting that it is approaching ₹9 lakh crore and claiming that this equates to every household in the state now ‘bearing a debt burden of ₹3 lakh each.’
But how should a state’s debt be assessed? What determines whether it is excessive or manageable?
The Finance Commission sets the annual borrowing limit for states. For 2024-25, this is capped at 3 percent of GSDP, with an additional 0.5 percent allowance for states implementing power sector reforms. Meanwhile, Tamil Nadu’s total debt stock – representing accumulated borrowings over the years – stands at 26.41 percent of GSDP, according to the state’s 2024 budget data.
Since the state’s total debt remains within the broad sustainability limits (typically recommended at 30-33 percent of GSDP by the 15th Finance Commission), it is not in violation of borrowing norms. Tamil Nadu continues to adhere to both the annual borrowing limit and overall debt sustainability, ensuring fiscal stability while funding essential development projects.
Speaking on the issue, economist and Head of Dr Ambedkar Centre for Economic Studies at the University of Madras, Jyothi Sivagnanam stated:
“Debt is a fundamental instrument of public finance. Simply stating that Tamil Nadu has ₹9 lakh crore in debt is misleading because debt must be assessed relative to a benchmark. The correct way to evaluate debt is by comparing it to the state’s Gross State Domestic Product (GSDP). Tamil Nadu’s debt remains within the limits prescribed by the 15th Finance Commission. Fear-mongering about absolute debt figures serves only political purposes.”
Professor Sivagnanam says comparing past debt levels with present figures is not meaningful without considering inflation and economic growth.
“A lakh rupees ten years ago is not the same as a lakh rupees today. If a product cost ₹1 lakh a decade ago, it might cost ₹10 lakh today. Inflation and economic changes must be factored in when evaluating debt,” he added.
While state governments cannot exceed the debt limits set by the Finance Commission, the Union Government has greater flexibility.
“The Union Government’s debt should ideally be within 40 percent of GDP, but in reality, it has exceeded 60 percent – 1.5 times the recommended limit,” said Professor Sivagnanam.
“Even developed countries like the United States have debts exceeding their GDP. The problem is not borrowing itself, but whether the government is generating sufficient revenue to manage it. Tamil Nadu faces challenges because its revenue sources have shrunk, particularly after the implementation of the Goods and Services Tax (GST).”
A major concern is Tamil Nadu’s reduced ability to generate independent revenue, particularly after the introduction of GST, which has led to increased fiscal dependence on the Union Government.
Professor Sivagnanam highlighted that the Union Government has significantly reduced tax devolution to states, with Tamil Nadu receiving only 30 percent of central taxes instead of the 41 percent recommended by the 14th Finance Commission.
Tamil Nadu Chief Minister MK Stalin has strongly criticised this approach before the 15th Finance Commission, emphasising the erosion of states’ financial autonomy.
He pointed out that despite the Finance Commission’s recommendations, Tamil Nadu’s actual share has been significantly reduced due to the Centre’s practice of retaining 100 percent of cesses and surcharges, which are excluded from the divisible pool.
Stalin argued that this systematic reduction in devolution has severely impacted Tamil Nadu’s ability to fund essential welfare schemes and infrastructure projects.
Professor Sivagnanam also noted that the Union Government has increased non-tax revenues while excluding states from these earnings.
For example, corporate tax cuts benefit businesses, but the lost revenue is not compensated to states. Instead of reinvesting public sector profits into growth, the Centre extracts dividends from public sector undertakings (PSUs). This money is never shared with states.
Currently, 50 percent of the Union Government’s revenue comes from non-tax sources, which it is not obligated to share with states.
When the Constitution was drafted, revenue-sharing was mandated because states bear two-thirds of government expenditure. At that time, revenue mainly came from taxes.
The Union Government has used this to its advantage by increasing non-tax revenues to bypass state governments, effectively restricting their financial autonomy.
Professor Sivagnanam highlights that even in the horizontal distribution formula for allocating funds among states, Tamil Nadu has received less financial support from the Union Government.
The justification given is that Tamil Nadu has effectively managed population growth and is economically developed. However, this reduction applies even to Centrally Sponsored Schemes (CSS), which the state is entitled to receive.
Professor Sivagnanam asserts that the Union Government does not have the authority to withhold these funds entirely.
The financial support Tamil Nadu is entitled to has been continuously declining. He points out that ₹2,152 crore meant for education and ₹3,000 crore under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) have not been disbursed.
He warns that this trend of reduced financial assistance from the Centre is expected to persist.
Additionally, he notes that Central Sector Schemes that could benefit Tamil Nadu – such as major infrastructure projects, airports, and industrial investments – are being directed elsewhere.
For instance, no major central government investments, like the Salem Steel Plant or Neyveli projects, have been allocated to Tamil Nadu. Unlike other states, Tamil Nadu has not received large-scale infrastructure projects that could generate long-term revenue.
Over the past four years, Tamil Nadu has consistently lost its share of funds from the Union Government:
Within this, both Finance Commission grants and tax devolution have seen a sharp decline:
Professor Sivagnanam emphasises that these financial constraints are major contributing factors to the increase in Tamil Nadu’s debt burden.
The Tamil Nadu government has consistently upheld the principles of social justice, ensuring the equitable distribution of resources, says Professor Sivagnanam.
This aligns with John Rawls’ Theory of Justice, particularly the Maximin Principle, which advocates maximising the welfare of those at the bottom of the socio-economic hierarchy. The government prioritises essential welfare measures for the most vulnerable sections of society.
In the 2024 budget, the Tamil Nadu government allocated nearly ₹83,988 crore for education, social welfare, healthcare, and the welfare of marginalised communities.
Despite financial constraints, Finance Minister Thangam Thennarasu has effectively managed the state’s fiscal challenges, says Professor Sivagnanam. The Tamil Nadu government has not curtailed any welfare schemes, ensuring that the state’s debt burden remains within manageable limits.
Professor Sivagnanam highlights that through strategic measures such as reclaiming unutilised funds across various departments, integrating financial resources, leveraging modern technologies, streamlining financial management, and ensuring direct bank transfers, the government has enhanced fiscal discipline.
These reforms, initially introduced by former Finance Minister PTR Palanivel Thiaga Rajan, have been continued and strengthened under Thangam Thennarasu, ensuring a more structured and efficient financial administration.
(Edited by Dese Gowda)
