CAG sounds alarm over Tamil Nadu’s widening revenue, spending gaps

While the numbers suggest Tamil Nadu’s economy grew robustly last year, the Comptroller and Auditor General (CAG)’s latest audit of the state’s finances tells a colder story about the revenue that growth is supposed to generate. Gross State Domestic Product (GSDP) rose 15.98 per cent in 2024-25, but revenue did not keep pace, according to the CAG.

The CAG report tabled in the Assembly records a revenue deficit of Rs 45,840 crore and a fiscal deficit of Rs 1,01,344 crore. Outstanding liabilities crossed Rs 8.53 lakh crore. The debt-to-GSDP ratio stayed inside the prescribed band.

The report flags leakages, delays and idle balances that shrink the room in the government coffers to spend on anything new.

Larger fear

Speaking with The Federal, economist A Kalaiyarasan, Associate Professor at the Madras Institute of Development Studies, said the headline boom should not be misread.

“High economic growth does not, by itself, mean a state should not borrow or run a revenue deficit. The CAG numbers can simply reflect a collapse of revenue generation rather than overspending,” he noted. “The serious concern is not only the size of the debt, but the collapse of revenue generation itself. That decline has been under way for at least a decade.”

Tax arrears mount

The sharpest finding is the pile of tax still uncollected. As of March 31, 2025, arrears under major heads stood at Rs 58,110 crore, which is 27 per cent of the state’s own revenue. More than Rs 28,726 crore had been outstanding for over five years.

Commercial taxes other than Goods and Services Tax (GST) and State GST accounted for most of it. Departments pointed to court stays, National Company Law Tribunal (NCLT) cases and dead firms. The CAG noted that a state that already runs a deficit cannot afford to leave that money on the table.

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Kalaiyarasan located the lag in a longer slide in tax effort. “Tamil Nadu was one of the few states that predominantly financed itself from its own tax. After GST, it suffered the most. The state’s own tax revenue to GSDP has fallen from 7.92 per cent in 2011-12 to 5.45 per cent in 2025-26," he observed.

Even GST, he said, is under-yielding. “Despite having the second-largest economy, Tamil Nadu’s GST collection is lower than Karnataka’s and Gujarat’s. A large part of the service sector still sits outside the tax net," he added.

Money lies idle

Money that did come in was not always put to work. Nearly Rs 4,976 crore sat unspent in Single Nodal Agency accounts meant for Centrally Sponsored Schemes. In Rural Development and Panchayat Raj alone, Rs 800 crore was idle, including Rs 690 crore under Pradhan Mantri Awas Yojana (PMAY). The sum was large enough for the Centre to hold back the next instalment.

Drawing and Disbursing Officers were separately sitting on Rs 565 crore in their own bank accounts at year-end, against rules that bar drawing funds unless they are needed at once.

A related bookkeeping habit has fattened old expenditure numbers. Departments remitted Rs 4,446 crore of earlier years’ unspent balances and overpayments back into the government account. That recovery line has risen almost eight-fold in five years. In one department, much of it related to works that never began. Auditors say drawing money only to park it later distorts both spending and the revenue deficit.

Paperwork piles up

Accountability is slipping in the paperwork as well. Utilisation certificates worth Rs 2,189 crore were pending in 112 cases. Temporary advances of Rs 158 crore, some dating to 2002 and 2005, had not been adjusted. GST and other refund claims of Rs 3,910 crore were outstanding. Each delay raises the risk that money shown as spent never reached the purpose printed against it.

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“Persistent arrears and money parked unused are not a welfare strategy,” Kalaiyarasan said. “They shrink the fiscal space the State needs for public investment.”

Investments underperform

Capital spending looks no cleaner. Seventy-five projects estimated at Rs 7,902 crore were still incomplete after Rs 6,178 crore had already been spent, said the CAG report. Some works due in 2015 were unfinished. Borrowed money locked in those sites continues to attract interest while the roads, tanks and buildings remain on paper.

The quality of the state’s investments is another cause for concern. The government put a fresh Rs 42,393 crore into companies last year. Of that, Rs 38,664 crore went to loss-making entities: the electricity board, the power distribution company and several transport corporations.

Total investment in public sector bodies now exceeds Rs 61,700 crore, and the return was 0.83 per cent, said the CAG report. The average interest on government borrowings was close to 8 per cent.

Power burden

Support to the power utilities remains heavy. Tariff subsidies and grants touched Rs 24,637 crore in a single year. Earlier shortfalls in taking over distribution company (discom) debt under the UDAY scheme had already added more than Rs 10,000 crore in extra interest.

Kalaiyarasan called this the political core of the fiscal problem. “The key sectors that drive the State into this debt trap are power and transport. The discom debt is the serious problem, but it is politically sensitive. Tamil Nadu has to recover costs gradually, not through an immediate tariff shock and pair that with institutional overhaul and accountability.”

Off-budget borrowings of about Rs 3,887 crore, some not fully disclosed, a Rs 101-crore shortfall in the government’s own pension contribution, and Rs 46 crore of unpaid interest on reserve funds further blur the true liability. Separately, 340 cases of misappropriation, losses and theft involving Rs 27.92 crore were still pending. More than 200 were over 21 years old. In at least one case, the money could not be recovered after the official was dismissed.

Welfare vs growth

Kalaiyarasan said the deficit is unsustainable for a specific reason. “A substantial portion of the deficit is simply to fund the revenue deficit. That is borrowing to finance current consumption rather than to create assets.”

“About 64 per cent of every rupee of revenue receipts is already pre-committed to salaries, pensions and interest. That story is well known. It leaves little room for any new scheme or any shock," he added.

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He rejected the easy charge that the state is merely profligate. “Tamil Nadu’s problem today is not fiscal profligacy. The pressing problem is its model of inclusive growth itself.” Welfare, he said, cannot stand in for a tightening revenue base.