Ahead of the Tamil Nadu 2025-26 budget presentation, scheduled for 14 March 2025, Chief Minister MK Stalin held in-depth discussions with the Economic Advisory Council (EAC) last week. The CM emphasized the importance of the meeting, describing it as critical in shaping the upcoming financial planning.
During the discussion, Stalin provided an overview of various welfare schemes that have benefited the state’s residents. These included initiatives such as the monthly honorarium for women, the Pudhumai Pen scheme for female students, the Naan Mudhalvan scheme, the Chief Minister’s breakfast program for schoolchildren, free bus rides for women, Makkalai Thedi Maruthuvam, and Illam Thedi Kalvi, among others. He highlighted that over the last four years, approximately 40 lakh people have secured employment through these efforts. The CM added, “Given this context, I look forward to your recommendations for propelling Tamil Nadu’s growth to the next level.” The meeting was attended by experts like Professor Esther Duflo, Dr. Arvind Subramanian, Professor Jean Dreze, Dr. S Narayan, as well as key officials, including Finance Minister Thangam Thennarasu and Chief Secretary N Muruganandam.
While the CM lauded the positive impact of these welfare programs, one could argue that the implementation of such initiatives, aimed at aiding the underprivileged, comes at the cost of an increasing financial burden. Critics might contend that the DMK government has been borrowing heavily to fund these populist schemes, often with an eye on gaining political favor rather than solely addressing the state’s long-term fiscal health.
The debt-to-GDP ratio is a crucial economic indicator, offering insight into a country’s or state’s ability to manage its debt in relation to its overall economic output. For India, the national debt-to-GDP ratio provides a general understanding of the nation’s debt sustainability. However, this figure alone doesn’t fully reflect the financial status of individual states, where distinct fiscal strategies and borrowing patterns exist.
In this context, the debt-to-GDP ratio of Indian states becomes an important measure for assessing financial health, influencing credit ratings, fiscal policies, and budgetary decisions. The ratio is calculated by dividing a state’s total debt by its GDP, then multiplying by 100 to express it as a percentage. For instance, Tamil Nadu’s ratio stands at 26.4%, while Maharashtra and Gujarat have lower ratios of 18.4% and 15.3%, respectively. According to the Fiscal Responsibility and Budget Management (FRBM) Act, states are advised to maintain their debt-to-GDP ratio within a 20% threshold, a target that Tamil Nadu currently exceeds.
Borrowing: AIADMK Vs DMK Regime
Tamil Nadu’s outstanding debt and Debt-to-GDP ratio reflect a decline in financial efficiency under the DMK’s governance. During the 10-year ADMK rule from 2011 to May 2021, the figures remained relatively stable, with an average Debt-to-GDP ratio of 17.86%.
However, in the 4 years since the DMK took power (2021-2025), the debt-to-GDP ratio has risen significantly, from 21.83% to 25.93%. This represents an increase of 82.80% in total debt over this period. The average Debt-to-GDP ratio between 2021 and 2025 alone is 25.18% which is quite alarming.
💡#Tamilnadu's Outstanding Debt and Debt-to-GDP Ratio shows the sagging efficiency under the DMK!
*10-year #ADMK rule: 2011-21 (May)
Numbers are steady 📈.*4-year #DMK rule: 2021-25
From 2021, the debt-to-GDP ratio has 🔺 from 21.83% to 25.93%.
Total Debt has 🔺 by 82.80%. pic.twitter.com/7r3llAoMZQ— Saikiran Kannan | 赛基兰坎南 (@saikirankannan) February 22, 2025
In 2023, industrialists warned the Tamil Nadu government that its current borrowing practices could lead the state into a debt trap. Experts highlighted that if the government continues to rely on borrowing to repay previous debts, rather than focusing on infrastructure development, attracting real investments in manufacturing, curbing leakages, expanding the tax base, and boosting investor confidence, the state is at risk. “Is Tamil Nadu heading toward a debt trap? The answer is a definite yes,” stated Sriram Seshadri, Founder and Managing Partner of Disha Consulting and former Partner and Managing Director of Accenture India.
Seshadri pointed out that Tamil Nadu is borrowing not only to settle existing debt but also to cover revenue expenditures. The state’s interest payments now account for nearly one-third of its revenue, and the cost of borrowing continues to rise year after year. He criticized the state’s indiscriminate distribution of freebies and subsidies.
Dr. Gowri Ramachandran, Economist and Chairperson of the Expert Committee on Economic Affairs at the Hindustan Chamber of Commerce, echoed concerns, emphasizing that highlighted that Tamil Nadu’s debt burden is among the highest in India, with the state’s outstanding liabilities estimated at Rs 7.54 lakh crore by the end of March 2023. This is primarily due to State Development Loans (SDLs), which account for a large portion of the state’s total debt. By 2026, the outstanding debt is expected to increase to 25.9% of GSDP.
Despite Tamil Nadu’s industrial base, other states are becoming more successful in attracting such investments, and Tamil Nadu’s fluctuating political stance on industrial projects, such as its opposition to the Sterlite Copper plant and the Chennai-Salem Expressway, has led to a loss of investor confidence. In conclusion, experts assert that to avoid falling deeper into the debt trap, Tamil Nadu must prioritize infrastructure investment, target subsidies effectively, and reduce financial leakages.
A high debt-to-GDP ratio indicates that a state’s debt burden is significant in relation to its economic output, signaling financial vulnerability and limited fiscal flexibility. With large debt levels, the state faces higher interest payments, which can limit funding for essential services like healthcare and education. This situation can also raise concerns among investors and credit rating agencies, leading to higher borrowing costs.
States dealing with high debt levels encounter several issues:
- Budget limitations: The substantial interest payments on debt reduce available funds for crucial sectors such as education and healthcare.
- Decreased fiscal flexibility: Elevated debt levels restrict the state’s ability to respond to economic slowdowns or unforeseen crises.
- Investor confidence: A high debt burden undermines investor confidence, driving up borrowing costs and stalling economic growth.
- Credit rating impact: Elevated debt levels can trigger credit rating downgrades, which increase perceived financial risk and further strain finances.
To address these challenges, states must adopt measures like austerity policies, fiscal reforms, and strategies to reduce debt.
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