Tamil Nadu’s outstanding debt nearly doubled to around ₹10 lakh crore during the five-year tenure of the previous DMK government, according to a White Paper released by the current state government, headed by C Joseph Vijay, which painted a grim picture of the state’s fiscal health and warned of mounting fiancial pressures ahead.
The White Paper said the state’s fiscal deterioration was ‘continuous’ and ‘structural’ rather than a temporary consequence of the Covid-19 pandemic, citing rising debt, record revenue deficits, weakening tax mobilisation and shrinking fiscal space for development expenditure.
Debt burden surges
According to the report, outstanding liabilities increased from ₹5.13 lakh crore on April 1, 2021, to nearly ₹10 lakh crore by March 31, 2026, representing one of the sharpest increases in the state’s history. The debt stock expanded at a compound annual growth rate (CAGR) of 14.3%, while the debt-to-GSDP ratio remained elevated at 28.3% despite the post-pandemic economic recovery.
The White Paper noted that while peer states such as Karnataka, Maharashtra and Gujarat used the recovery period to improve their fiscal positions, Tamil Nadu failed to materially reduce its debt burden. Per-capita liability climbed to ₹1,28,934, significantly higher than comparable states.
Record revenue deficit raises concerns
The report highlighted that Tamil Nadu’s revenue deficit reached a record ₹78,324 crore in 2025-26, the highest ever recorded by the state and even exceeding the Covid-affected year of 2020-21 in absolute terms. The revenue deficit stood at 2.22% of GSDP, indicating that the state was borrowing to fund routine expenditure rather than asset creation.
Revenue deficit rose from ₹46,538 crore in 2021-22 to ₹78,324 crore in 2025-26, underscoring persistent fiscal stress throughout the period.
Interest costs crowd out development spending
The state’s annual interest payments jumped 61% to ₹67,050 crore in 2025-26 from ₹41,564 crore in 2021-22. Interest payments now consume nearly 23% of total revenue receipts and more than one-third of the state’s own tax revenue, the White Paper said.
The report noted that Tamil Nadu now spends more on servicing past borrowings than on creating new assets, with the ratio of interest payments to capital expenditure reaching 1.32:1.
Tax mobilisation weakens
Another major concern flagged by the White Paper was the decline in the state’s tax effort. Tamil Nadu’s own-tax revenue-to-GSDP ratio fell from 5.93% in 2021-22 to 5.45% in 2025-26, the lowest level in the state’s history.
The report estimated that the decline translated into roughly ₹51,000 crore of foregone revenue over the last three years. The deterioration was observed across key revenue streams, including GST, petroleum VAT, state excise, stamp duty and motor vehicle taxes.
Fiscal flexibility shrinks
The White Paper said committed expenditure, including salaries, pensions and interest payments, increased from ₹1.25 lakh crore to ₹1.89 lakh crore during the period. As a result, nearly 87% of the state’s revenue receipts are now pre-committed before the annual budget process begins, leaving limited room for fresh development initiatives.
Capital expenditure fell to 1.44% of GSDP in 2025-26 from 1.79% in 2021-22, reducing the state’s ability to invest in growth-generating infrastructure.
Hidden liabilities add to risks
Beyond direct debt, the White Paper warned that contingent liabilities significantly worsen the state’s financial exposure. Government guarantees nearly tripled to ₹1.8 lakh crore by March 2026, while major power, transport and civil supplies undertakings collectively carried debt of about ₹3.18 lakh crore.
Including these obligations, the state’s aggregate fiscal exposure approaches ₹13.18 lakh crore, posing a substantial long-term risk to public finances, the report said.
Outlook remains challenging
The White Paper projected that Tamil Nadu’s revenue deficit could widen further to around ₹90,500 crore in 2026-27, significantly higher than estimates presented in the Interim Budget. It also warned that borrowing constraints and mounting expenditure commitments could leave little room for new programmes unless fiscal corrections are undertaken.
The report concluded that Tamil Nadu’s fiscal challenges require sustained reforms in revenue mobilisation, expenditure management, public sector undertakings and debt management to restore long-term financial stability.