TN white paper’s bigger warning is not debt, but revenue slump: Economist

Tamil Nadu's latest white paper was meant to spotlight the fiscal legacy of the previous government. Instead, it may have exposed a deeper problem that has survived successive administrations.

The TVK government's assessment paints a worrying picture of the state's finances, citing rising debt, widening deficits, mounting liabilities at state-owned enterprises, and growing demographic pressures.

But economist Kalaiyarasan Arumugam, in an exclusive interview with The Federal, says the report's most important finding is not that Tamil Nadu is drowning in debt. It is that the state's ability to generate revenue appears to be steadily weakening.

DMK in AIADMK shoes

“The two reports are remarkably similar in tone and tenor," Kalaiyarasan said, referring to the white papers released by the DMK government in 2021 and the TVK administration this year. "The current report is essentially continuing the scrutiny that began in 2021."

The parallels are striking.

Also read: Widening revenue deficit, growing debt: TVK white paper signals TN fiscal crisis

Five years ago, then finance minister Palanivel Thiaga Rajan released a white paper blaming the AIADMK government for leaving behind stressed public finances. This year, Finance Minister Marie Wilson has published a 120-page assessment accusing the DMK of allowing debt and deficits to rise.

Yet Kalaiyarasan sees continuity rather than contradiction.

‘No reason to panic’

The latest report estimates Tamil Nadu's debt at around 28 per cent of Gross State Domestic Product (GSDP), above the 25 per cent threshold prescribed under fiscal responsibility laws. Revenue deficit has widened to about 2.2 per cent of GSDP, while the government has highlighted the growing debt burden carried by every resident of the state.

Those numbers deserve attention, Kalaiyarasan said, but they do not point to an imminent fiscal crisis.

"There is a cause for concern, but not a reason for panic," he said.

TN remains among India's largest contributors to national output and has maintained strong economic growth. Yet tax collections have not kept pace with that expansion.

Economists typically assess public debt relative to the size of the economy and the government's capacity to repay. By that measure, Tamil Nadu remains one of India's largest and most diversified state economies. Debt levels have breached prescribed limits and should be brought down over time, Kalaiyarasan said, but the state's finances are not in the kind of distress suggested by some of the political rhetoric surrounding the report.

Revenues slump more concerning

The more significant warning lies in a trend that has received far less attention.

Tamil Nadu's own-tax revenue as a share of GSDP has steadily declined over the past decade. According to figures cited in the white paper, the ratio that stood at nearly 8 per cent in 2011, fell to about 5.9 per cent by 2021 and has now dropped further to roughly 5.4 per cent.

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For a state that built its development model on strong revenue mobilisation and extensive investments in health, education and welfare, the decline represents a structural challenge.

"Tamil Nadu's growth model was built on generating revenue and investing it in human capital," Kalaiyarasan said. "That cycle appears to be weakening."

Growing economy, falling taxes

The puzzle is particularly striking because Tamil Nadu's economy continues to expand rapidly. The state remains among India's largest contributors to national output and has maintained strong economic growth. Yet tax collections have not kept pace with that expansion.

Five years ago, the debate centred on whether Tamil Nadu had inherited a fiscal problem. The latest report raises a more uncomfortable question: why has so little changed since then?

The white paper points to weaknesses in commercial tax collections, leakages in several revenue streams, and a mismatch between the structure of the economy and the taxes being collected.

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Services account for more than half of Tamil Nadu's economic output today, but that dominance is not reflected proportionately in tax collections. The report also flags concerns over GST collections, stamp duties, and mineral revenues.

"If the economy is growing in double digits, why isn't revenue growing proportionately?" Kalaiyarasan said. "That is the question policymakers should be trying to answer."

Who’s to blame?

A part of the challenge stems from changes in India's fiscal architecture. Since the introduction of the Goods and Services Tax (GST), states have lost much of their ability to independently alter tax rates. Southern states, including Tamil Nadu, have also repeatedly argued that changes in Finance Commission formulas have reduced their share of central transfers.

Even so, Kalaiyarasan argues that the latest white paper points to problems that cannot be explained solely by New Delhi.

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Historically, Tamil Nadu distinguished itself by relying less on central transfers than many other states. Its development model depended on generating its own revenues and using those resources to fund social investments. The weakening of that capacity, therefore, strikes at the heart of the state's economic model.

Shrinking fiscal flexibility

The report also highlights another emerging constraint: shrinking fiscal flexibility. Nearly 87 per cent of state expenditure is effectively pre-committed through salaries, pensions, interest payments, and statutory obligations, it says.

Such spending leaves governments with limited room to respond to economic shocks, expand capital investment, or introduce new programmes.

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The pressure is compounded by the financial strain at state-owned entities such as Tangedco and transport corporations. Both played a transformative role in Tamil Nadu's development by expanding access to electricity and mobility. But decades of subsidies and cross-subsidisation have produced mounting liabilities that successive governments have struggled to address.

More expenses for ageing population

At the same time, the state faces a demographic transition that could further tighten public finances.

Tamil Nadu's fertility rate has remained below replacement level for years, while life expectancy has risen steadily. The result is a rapidly ageing population that will require higher spending on healthcare, pensions and social support even as the share of working-age taxpayers shrinks.

That challenge is not unique to Tamil Nadu. But it is arriving at a moment when the state's revenue-generating capacity is already under pressure.

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The white paper was released by a new government seeking to draw attention to the failures of its predecessor. Yet its most important takeaway may be that many of the structural concerns identified five years ago remain unresolved.

Five years ago, the debate centred on whether Tamil Nadu had inherited a fiscal problem. The latest report raises a more uncomfortable question: why has so little changed since then?

"The diagnosis was already made in 2021," Kalaiyarasan said. "The question is what happened after that."