Chennai: Ahead of presenting its first Budget during the July Assembly session, the Chief Minister C. Joseph Vijay-led Tamilaga Vettri Kazhagam (TVK) government has released a White Paper highlighting the state’s deteriorating financial position, pointing to rising debt, shrinking revenues and increasing interest payments as major challenges inherited from the previous administration.

The report, which reviews the state’s finances from 2021-22 to 2025-26, paints a concerning picture of Tamil Nadu’s fiscal health during the tenure of the M.K. Stalin-led DMK government. It argues that mounting liabilities, structural revenue deficits and escalating committed expenditure have significantly reduced the state’s financial flexibility.

The findings also provide context for the new government’s ability to implement its election promises, many of which involve substantial welfare spending.

Debt has nearly doubled in five years

One of the key concerns raised in the White Paper is the sharp rise in Tamil Nadu’s outstanding liabilities.

According to the report, the state’s debt increased from ₹5.13 lakh crore in 2020-21 to ₹10 lakh crore in the revised estimates for 2025-26. The 2026-27 Interim Budget projects the figure to rise further to ₹10.72 lakh crore.

Although the debt-to-Gross State Domestic Product (GSDP) ratio declined marginally from 28.7 per cent in 2020-21 to 28.3 per cent in 2025-26, the White Paper noted that the pace of borrowing remained higher than the growth in the state’s nominal economy during most of the post-pandemic period.

It stated that outstanding liabilities grew at a compound annual growth rate (CAGR) of 14.3 per cent over the five-year period.

The report also observed that the debt accumulated during these five years alone exceeded the total debt Tamil Nadu had built up during its first six decades.

Higher per capita debt than major states

Comparing Tamil Nadu with other industrialised states, the White Paper noted that only Maharashtra had a marginally higher total debt at ₹10.03 lakh crore in 2025-26.

However, Tamil Nadu recorded the highest per capita debt among major states.

The report estimated Tamil Nadu’s per capita debt at ₹1.29 lakh, compared to ₹1.11 lakh in Karnataka, ₹77,569 in Maharashtra and ₹70,798 in Gujarat.

The document also highlighted that loss-making public sector enterprises, particularly those in the electricity sector, contributed significantly to the debt burden.

According to the report, the power sector alone accounted for ₹1.42 lakh crore, or 14 per cent, of the state’s total liabilities as of March 2026.

Rising interest payments add pressure

The White Paper warned that Tamil Nadu was entering what it described as a “debt-interest spiral”, where increasing borrowings are required to service existing debt.

It stated that interest payments have become one of the largest components of the state’s expenditure and are consuming an increasing share of revenue receipts.

Interest payments, which stood at ₹41,564 crore in 2021-22, are projected to increase to ₹78,677 crore in 2026-27.

This represents an increase from 20.03 per cent of revenue receipts to 22.83 per cent.

According to the Interim Budget projections, annual interest payments are expected to exceed ₹1 lakh crore by 2028-29, accounting for 23.54 per cent of total revenue receipts.

The report noted that unlike discretionary expenditure, interest payments cannot be deferred, making them a permanent obligation on the state’s finances.

Capital expenditure trails debt servicing

The White Paper pointed out that interest payments now exceed capital expenditure, reducing the government’s capacity to invest in infrastructure and long-term development.

In the 2026-27 Interim Budget, interest payments exceeded capital outlay by more than ₹19,000 crore.

Similarly, revised estimates for 2025-26 showed a gap of nearly ₹17,700 crore between interest payments and capital expenditure.

According to the report, the last time capital expenditure exceeded interest payments was in 2016-17.

The report argued that this trend limits the state’s ability to create productive public assets while increasing dependence on borrowing.

Committed expenditure continues to rise

Apart from interest payments, the White Paper highlighted a steady increase in committed expenditure, which includes salaries, pensions and debt servicing.

Committed expenditure rose from ₹1.25 lakh crore in 2021-22 to ₹1.89 lakh crore in 2025-26.

Its share in total revenue receipts also increased from 60.4 per cent to 64.4 per cent during the same period.

The report observed that comparable states such as Karnataka, Gujarat and Maharashtra maintained committed expenditure below 50 per cent of their revenue receipts.

Higher committed expenditure leaves limited fiscal space for introducing new welfare schemes or increasing developmental spending.

Revenue growth fails to keep pace

The White Paper also identified weakening revenue generation as a major contributor to the state’s financial challenges.

Tamil Nadu’s revenue receipts as a percentage of GSDP declined from 10.01 per cent in 2021-22 to 8.32 per cent in 2025-26.

Although the state’s own tax collections increased from ₹1.23 lakh crore to ₹1.93 lakh crore, tax revenue as a share of GSDP declined from 5.93 per cent to 5.45 per cent.

The report said this indicated a gradual erosion of the state’s fiscal independence despite growth in absolute tax collections.

Tamil Nadu continues to trail Maharashtra and Karnataka on this indicator while remaining marginally ahead of Gujarat.

Centre’s tax devolution also highlighted

The White Paper also attributed part of the state’s fiscal stress to declining tax devolution from the Union Government.

According to the report, Tamil Nadu’s share of central taxes has fallen from 6.64 per cent under the 10th Finance Commission to 4.097 per cent under the 16th Finance Commission, representing a decline of around 38 per cent over three decades.

The government argued that the allocation does not adequately reflect Tamil Nadu’s contribution of more than 9 per cent to the national economy and its share of over 6 per cent of India’s population.

Structural revenue deficit remains a challenge

The report concluded that Tamil Nadu’s revenue deficit has become structural rather than temporary.

It noted that the state has recorded a revenue deficit every year since 2013-14, despite periods of economic recovery and post-pandemic growth.

The Tamil Nadu Fiscal Responsibility Act originally envisaged eliminating the revenue deficit, but the deadline has been revised multiple times and now stands at 2026-27.

The White Paper stated that sustained fiscal reforms, stronger revenue mobilisation and prudent expenditure management would be essential to restore the state’s financial stability.

As the TVK government prepares to present its first Budget, the report is expected to shape policy decisions and influence the pace at which new welfare promises are implemented amid growing fiscal constraints.