Reclaiming Tamil Nadu’s fiscal autonomy and sustaining its growth model
The Government of Tamil Nadu’s white paper is a comprehensive analysis of the state’s financial situation and economic conditions. TVK’s 120-page document, which is detailed like the technical report prepared by DMK in 2021, begins with an important line: ‘This is neither a retrospective accusation nor a political statement’. In that sense, this is a real exercise. It actually offers an honest explanation of what’s going wrong with tax collection: a shrinking base and built-in leaks in both revenue collection and spending patterns. Although the diagnosis is certain, it is not yet clear how the government will fix the leaks and deliver the prosperity it promised during the election campaign.
The white paper lays out the structural weaknesses faced by the Tamil Nadu economy and possible course correction in this sense, which has much more continuity with the previous report presented by the DMK. Both literally state that “current fiscal deficit levels are unsustainable because a significant portion of the fiscal deficit is simply financing the revenue deficit.” This means that the State borrows to finance current consumption rather than to create assets. Of course, for every rupee borrowed, about 60 paise goes towards current consumption. However, since significant expenditures on health and education are included in the revenue account, it is necessary to avoid reading too much into this issue.
In an economy, the government must create resources to provide public goods and services, build the social and physical infrastructures necessary for growth, and protect vulnerable people from market forces. In this sense, every policy is a political choice that has losers and winners not only within the current generation but also across generations; because public debt transfers the burden of payment to future governments. The white paper says the state is in debt and its fiscal deficit is beyond the projected limit. On an average, an individual pays INR 38,000 to the State and Union government in all taxes and receives subsidies and services worth around INR 54,500. The gap is usually financed through debt. At that time the consolidated debt of each individual was around ₹ 1.29 lakh and the cumulative debt was around 28% of the State revenue, which causes concern today.
Collapse of revenue generation
The serious concern pointed out by the report is not just about debt but also about the collapse of income generation. While the white paper shows an accounting of revenue generation for the last five years, the collapse predates that by at least a decade. Make no mistake, Tamil Nadu was one of the few States that survived mainly on its own revenue for expenses; Approximately 70% of its expenses were from its own tax; This was in stark contrast to States like Bihar and Uttar Pradesh, which relied heavily on transfer from the Centre. With the introduction of GST in 2017, States lost their sovereignty over taxation. Tamil Nadu suffered the most. The ratio of State Own Tax Revenue (SOTR) to GSDP, which was 7.92% in 2011-12, decreased steadily to 5.93% in 2021-22 and 5.45% in 2025-26.
While the white paper clearly shows that the decline is spread across all major tax heads such as GST, petroleum VAT, state excise duty, stamp duty and motor vehicle duty, GST alone accounts for around 53% of total tax revenue. Despite GSDP having the second largest economy with a size of ₹ 35.29 lakh crore, GST collection was ₹ 72,008 crore lower than that of Karnataka (₹ 87,256 crore) and Gujarat (₹ 80,823 crore). Apart from systemic corruption and inefficiencies in tax collection, the predominance of the service sector also contributed to the decline in GST collections. Many units in the sector appear to be outside the tax net.
Similarly, no progress has been made in motor vehicle tax collection as the number of vehicles registered in the State is not at the same level. I’m not even talking about undervaluation of real estate during registration, stamp duties in rent-seeking sectors such as real estate, which are known for excessive smuggling and corruption. Even mining revenues are among the most striking examples of the stagnation in non-tax revenues. Apart from corruption in valuation, leakage in valuation of minor mineral extraction also contributed to the decline. The main sectors that drag the state into this debt trap are the energy sector and transportation. The power sector alone carries debt of ₹2.47 lakh crore. The state has historically built a progressive model of power subsidy by taxing industries and paying the poor and farmers who have become sites of political rent-seeking tied to election cycles.
Lost tax sovereignty and Union transfer
Besides the steady decline in its own tax collection, the State is also gradually losing its share of Union transfers. For example, Union tax devolution and relief grants together accounted for about 34.95% of Total Revenue Receipts in 2021-22, falling to 25.5% in 2025-26. This decline again occurred before the decade. While the state’s share in total transfers was 5.305 percent in the 12th Finance Commission period, it decreased to 4.969 percent in the 13th Finance Commission period and to 4.023 percent in the 16th Commission period.
This decreasing share is due to the formula adopted by successive Fiscal Commissions. The high weight of per capita income distance with population has its disadvantages. The state became a victim of its own success. Even the weighted GDP contribution introduced in the 16th Finance Commission did not help as the formula was reversed. Neither area criteria nor forest cover can help this.
On the other hand, the shareable divisible pool is shrinking due to the Union government’s arbitrary tax deductions and surcharges that take away the legitimate resources of the States. In this sense, the State is a victim of both vertical and horizontal dispersion. With Union transfers declining and its own revenue base eroding, Tamil Nadu’s government size, measured by the ratio of total expenditure to GDP, has shrunk, weakening the State’s fiscal capacity. This situation limits the state’s ability to intervene in the economy. About 64% of every rupee of revenue receipts in 2025-26 has been pre-committed on account of salaries, pensions and interest, the whitepaper shows. With inflexible discretionary obligations at 23 percent, this previously committed spending increases to 87 percent, leaving little room for any additional spending or new plans. Global uncertainty or any external shock can paralyze the economy.
Debt, demographics and the spreader effect
This potential debt trap also comes at a time when the state is witnessing faster demographic change. It is aging faster than any other major state in India. Tamil Nadu’s average age is 34.25 years, about 9.5 years older than Uttar Pradesh, and the elderly dependency ratio is projected to rise from 20.6 in 2021 to 32.7 in 2036. This has two consequences. The ability to repay the debt is limited, the article argues, because a shrinking working-age population means a shrinking tax base. This also means that higher social spending is needed as the share of the elderly population increases. The interaction between a rising stock of debt and a shrinking working-age population can create the conditions for a debt trap, what demographers call the ‘scissors effect’, meaning the widening gap between income capacity and spending obligations.
But Tamil Nadu’s problem today is not financial profligacy or corruption. The immediate problem is the inclusive growth model itself. The challenge is therefore to get investment, create decent jobs, improve wages, while actively renegotiating the fiscal space with the Union. The welfare architecture built by the state is not enough. Educated young people rallying behind TVK do not want more prosperity, but decent jobs and wages. Welfare cannot replace jobs and wages. It is time to get the growth foundations right, which requires investing in education, health and public infrastructure. Prime Minister Joseph Vijay therefore has a huge responsibility to not only get the inclusive growth model back on track but also to reclaim fiscal autonomy from the Union.
It was published – 22 June 2026 16:16 IST
