Sustainable debt to GSDP ratio for Tamil Nadu is 23%, says Economic Adviser to Government

KR Shanmugam, Economic Adviser to the State Government | Photo credit: B. Jothi Ramalingam

Amid the raging debate over the level of Tamil Nadu’s public debt, economic adviser to the state government KR Shanmugam says the sustainable level of debt to gross state domestic product (GSDP) ratio for the state is 23%.

Arguing for lowering the level from the existing 27%, Mr Shanmugam says that although the Committee on Fiscal Responsibility and Budget Management (FRBM) headed by former civil servant NK Singh in its report prepared in 2017 prescribed 20% as a prudent limit for states in general, an additional three percentage points can be added for the past five supra-odd macroeconomic years, considering Tamil macroeconomic factors.

The experienced economist emphasizes that lending in itself is not an undesirable activity and says that it is one of the main sources of financing development projects. “When borrowed funds are invested in productive assets and infrastructure that generate economic growth and future revenue, the government will be able to service its debt with increased revenue. In that case, debt is not a problem at all,” he points out.

But when the debt-to-GSDP ratio exceeds prudent levels, it becomes unsustainable and the debt service burden becomes excessive going forward, crowding out productive spending and pushing the government into a debt trap — a situation that is “bad for growth, development and stability,” notes Mr. Shanmugam.

Admitting that the debt issue is widespread in the country and not limited to Tamil Nadu, he says only three states — Gujarat, Odisha and Maharashtra — have a debt-to-GSDP ratio of less than 20%. While all others have crossed the threshold, nine states – Andhra Pradesh, Bihar, Kerala, Madhya Pradesh, Punjab, Rajasthan, Telangana, Uttar Pradesh and West Bengal – have higher ratios than Tamil Nadu.

Pandemic effect

Like most other states, Tamil Nadu’s debt-to-GSDP ratio shot up in the year of the COVID-19 pandemic (2020-21) from which it failed to recover. In 2019-20, it was 22.78%. The next year it rose to 28.67%. Since then it has ranged from 28% to 26%.

Although Tamil Nadu is praised for keeping its fiscal deficit at 3% of GSDP, Mr. Shanmugam worries that the revenue deficit (excess of revenue expenditure over revenue receipts) is about 1.4% of GSDP, which means that nearly 50% of borrowed money is spent on consumption and not investment.

The way forward

To achieve a sustainable level of debt-to-GDP ratio of 23% around 2050-51, the country should achieve 15% nominal economic growth per year and keep the fiscal deficit at 3%. If it wants to reach this level faster, it should at least reduce the fiscal deficit. For example, assuming the state is able to maintain the fiscal deficit at 2.5% with 14% nominal economic growth, it may reach 23% in 2033-34.

Mr Shanmugam makes a strong case for rationalizing spending, adding that the government should not hesitate to ditch outdated and unproductive welfare systems. More importantly, she should avoid implementing the main election promise of the ruling Tamilaga Vettri Kazhagam to increase the monthly assistance amount under the Magalir Urimai Thogai from the existing ₹1,000 to ₹2,500 for all women below the age of 60 until fiscal consolidation is achieved.

Published – 04 Sep 2026 17:26 IST