The fiscal debate must move from the quantum of debt to quality of borrowing
TN’s debt-GSDP ratio was estimated at 21% in 2018-2019, and rose to about 29% in 2021-2022, reflecting the fiscal shock caused by COVID-19, the additional borrowing space provided under the Aatma Nirbhar Bharat Package, and the recommendations of the Fifteenth Finance Commission. Thereafter, the ratio declined to 27% in 2024-2025 and is estimated at 26.7% in 2025-2026 revised estimates (RE). Interest payments are estimated to take up a fifth of its revenue in 2026-2027, while almost half (43%) of its debt must be repaid within seven years, increasing refinancing risks. This raises concerns about whether its debt, at 26.7% of the state’s economy, can be managed over time. Several states have higher debt as a share of their economies: Punjab (45.2%), Rajasthan (38%), West Bengal (37.52%), Bihar (37.1%), Andhra Pradesh (36%), Kerala (34.26%) and Telangana (28.3%). Madhya Pradesh (32.2%) and Uttar Pradesh (27.6%) also have high debt. Among major states, only Odisha, Gujarat and Maharashtra have ratios below 20%. With a primary-deficit-GSDP ratio of 1.5%, nominal growth of 14.4% and an interest-to-debt ratio of 7.2% in the 2025-2026RE, Tamil Nadu’s implied sustainable debt-GSDP ratio is 23%. This is higher than 20% norm recommended by the fiscal responsibility and budget management review committee. To bring down the debt-GSDP ratio, TN would need to keep annual borrowing below 3% of GSDP.
This trend is significant because, while nominal GSDP growth was at 13% in 2025-2026, the growth of outstanding debt was only 11.5%. Tamil Nadu ’s debt is often discussed as a sign of financial trouble. But the truth is, the state’s debt dynamics have not always been adverse. The traditional view is that public borrowing should finance capital expenditure to build road networks and other infrastructure assets. But in recent years, TN’s capital expenditure has been lower than its net borrowing. High debt is not a problem unique to Tamil Nadu. Govts need to borrow to build infrastructure and support development, but they also must be able to manage debt. An economic test, known as the Domar condition, assesses this by looking at economic growth, the interest rate on debt and the primary deficit, which is the gap between govt spending and income before interest payments. However, this should be treated as a guideline rather than a rigid rule.
Tamil Nadu’s 2026-2027 budget proposes revenue expenditure of `4 lakh crore and capital outlay of `56,985 crore. In 2015-2016, 53% of borrowed funds were used for capital expenditure and 34% for revenue expenditure. More recently, 62% of borrowed resources have been used for revenue expenditure and debt repayment, leaving only 32% for capital creation.
This reveals the limitations of the traditional distinction between capital and revenue expenditure. The composition of borrowing has also shifted. This means a smaller share of borrowing is directly funding new assets. Secondly, net borrowing should be assessed in relation to productive investment. Since public funds are fungible, there is no straightforward way to trace individual borrowed rupees to specific programmes. An alternative approach is to examine whether incremental debt, net of principal repayments, is matched by investment in infrastructure, education, health, essential maintenance, technology and better public institutions.