Restoring Tamil Nadu’s fiscal autonomy and sustaining its growth model
The Tamil Nadu Government White Paper is a comprehensive analysis of the state’s financial status and economic conditions. The 120-page TVK document, as detailed as a white paper prepared by the DMK in 2021, opens with an important sentence: “it is neither an exercise in retrospective guilt nor a political statement”. In that spirit, this is a real exercise. Indeed, it offers an honest account of what has gone wrong in tax collection: the shrinking base and the leakages embedded in both revenue collection and expenditure patterns. While her diagnosis is stark, it is unclear how the government will fix the leaks and maneuver the welfare it promised during its election campaign.
The white paper exposes the structural weaknesses facing Tamil Nadu’s economy and a possible course correction, which in this sense has much more continuity with the previous one presented by the DMK. Both literally say that “current fiscal deficit levels are unsustainable primarily because a substantial portion of the fiscal deficit is only to finance the revenue deficit.” This means that the government is simply borrowing to finance current consumption rather than creating assets. Sure, for every rupee borrowed, about 60 paise goes to current consumption. But one must be careful not to read too much into this, as substantial expenditure on health and education is under the revenue account.
In an economy, government must raise resources to pay for the provision of public goods and services, build the social and physical infrastructure needed for growth, and protect the vulnerable from market forces. In this sense, each policy is a political choice with losers and gainers not only within the current generation but also across generations, as public debt shifts the burden of payment to future governments. The White Paper says that the state is deeply in debt and its fiscal deficit exceeds the prescribed limit. On an average, an individual pays ₹38,000 in all state and Union government taxes and receives subsidies and services worth about ₹54,500. The gap is usually financed by loans. The consolidated debt of each individual is then around ₹ 1.29 lakh and the cumulative debt is about 28% of the national income, which is a cause for concern today.
Collapse of income generation
The serious concern the report cites is not just debt, but the collapse of income generation itself. While the white paper shows an account of revenue generation over the last five years, the collapse predates this by at least a decade. Make no mistake, Tamil Nadu was one of the few states that was largely self-revenue for its expenditure – about 70% of its expenditure from its own taxes, in stark contrast to states like Bihar and Uttar Pradesh, which rely heavily on devolution from the centre. With the introduction of GST in 2017, states lost their tax sovereignty. Tamil Nadu suffered the most. State Own Tax Revenue (SOTR) to GSDP, which was 7.92% in 2011-12, has been steadily declining and has declined to 5.93% in 2021-22 and further declined to 5.45% in 2025-26.
While the white paper clearly shows that the decline is across all major tax heads – GST, Petroleum VAT, State Excise, Stamp Duty and Motor Vehicle Tax, GST alone accounts for around 53% of total tax revenue. Despite having the second largest economy with a ₹35.29 crore GSDP, its GST collection was ₹72,008 crore lower than that of Karnataka (₹87,256 crore) and Gujarat (₹80,823 crore). Apart from systemic corruption and inefficiency in tax collection, the preponderance of the service sector also contributed to the decline in GST collection. Many units in the sector appear to be outside the tax net.
Likewise, motor vehicle tax collection has not kept pace as the number of vehicles registered in the state has not kept pace. Not to mention stamp duty in rent-seeking sectors such as real estate, which are notorious for undervaluing property at registration and excessive leakages and corruption. Income from mining is also among the most prominent examples of stagnation of non-tax income. In addition to corruption in valuations, leaks in small-scale mining valuations also contributed to the decline. The key sectors driving the country into this debt trap are energy and transport. The power sector alone carries a debt of ₹2.47 crore. The state has historically built a progressive model of subsidizing power—taxing industry and paying the poor and farmers—which have become sites of political rent-seeking tied to election cycles.
Loss of fiscal sovereignty and transfer of the Union
In addition to the constant decline in its own tax collection, the state is increasingly losing its share of the EU transfer. For example, Union tax devolution and support subsidies together accounted for about 34.95% of total revenue in 2021-22, falling to 25.5% in 2025-26. This decline again precedes the decade. The state’s share of the total transfer was 5.305% during the 12th Finance Commission period, but it fell to 4.969% during the 13th Finance Commission period and fell to 4.023% during the 16th Commission period.
This declining proportion is due to the formula adopted by successive Finance Commissions. The high weight relative to distance of income per capita combined with population has disadvantages. The state has become a victim of its own success. Even the weightage of contribution to GDP introduced in the 16th Finance Commission did not help as the pattern was reversed. The criteria of area and forest cover did not help either.
On the other hand, the shared divisible pool is shrinking due to arbitrary cesses and surcharges imposed by the Union Government, which take away the legitimate resources of the states. In this sense, the state is a victim of both vertical and horizontal distribution. With Union transfers declining and its own revenue base eroding, the size of the Tamil Nadu government, measured by total expenditure as a share of GSDP, has shrunk, weakening the state’s fiscal capacity. Together, this limits the state’s ability to intervene in the economy. As the white paper shows, about 64% of every rupee of revenue in 2025-26 is pre-credited to the salary, pension and interest account. With inflexible non-discretionary commitments of 23% percent, this pre-pledged spending rises to 87%, leaving little room for any additional spending or any new programs. Global uncertainty or any exogenous shock could paralyze the economy.
Debt, demographics and the scissor effect
This potential debt trap also comes at a time when the state is experiencing faster demographic changes. It is aging faster than any other major state in India. Tamil Nadu’s median age is 34.25 years – almost 9.5 years older than Uttar Pradesh’s, and its old-age dependency ratio is projected to rise from 20.6 in 2021 to 32.7 by 2036. This has two implications. The ability to service debt is limited, the paper argues, because a shrinking working-age population means a shrinking tax base. It also means the need for higher social spending as the share of the elderly population grows. The interaction between rising debt and a shrinking working-age population can create the conditions for a debt trap that demographers call the “scissors effect”—a widening gap between earning capacity and spending obligations.
But Tamil Nadu’s problem today is not fiscal profligacy or corruption. The pressing issue is the inclusive growth model itself. So the real challenge is attracting investment, creating decent jobs, improving wages and actively renegotiating the fiscal space with the Union. The social architecture that the state has built is not enough. The educated youth who have gathered behind TVK are not looking for greater prosperity, but decent work and wages. Social Security cannot replace work and wages. It is time to get the foundations of growth right, which require investment in education, health and public infrastructure. Thus, Chief Minister Joseph Vijay has a huge responsibility to not only bring the inclusive growth model back on track but also to reclaim fiscal autonomy from the Union.
Published – 22 Jun 2026 16:16 IST