As the C Joseph Vijay-led Tamilaga Vettri Kazhagam (TVK) government prepares to present its maiden Budget later this month, its fiscal strategy is beginning to take shape. The focus is on improving tax collections through stricter enforcement, plugging revenue leakages, reforming state-owned enterprises, and curbing wasteful expenditure, while protecting politically sensitive welfare schemes and sustaining capital expenditure needed for long-term growth.Economists, industry experts and policymakers broadly agree that Tamil Nadu’s fiscal revival hinges on stronger tax administration, more efficient public sector enterprises, better-quality expenditure and greater fiscal space for capital investment. Together, these reforms could put the state’s finances on a more sustainable footing without compromising its development goals.Perhaps the biggest opportunity lies in improving tax collections rather than raising tax rates. Tamil Nadu remains India’s second-largest state economy with a diversified manufacturing and services base, yet it continues to underperform several peers in GST collections. In FY26, Karnataka collected `87,256 crore in GST, Gujarat `80,823 crore and Tamil Nadu `72,008 crore. “This is not a structural story. It is an administrative one,” says Nithin Chandra, senior partner, Kearney.According to him, the state’s economic strength should naturally translate into higher tax revenues. Instead, weak enforcement, leakages and inadequate scrutiny have reduced revenue efficiency despite robust economic growth. The services sector offers the single biggest opportunity. There is a 16-percentage-point gap between the sector’s share in GSDP (53.6%) and its contribution to GST collections (37.8%). Closing even half of this gap could generate an additional `12,000-15,000 crore annually through better compliance and more effective tax administration, says Chandra (read his interview below).The White Paper also attributes the state’s muted revenue performance to leakages in tax administration. In response, the TVK government has begun strengthening audit and scrutiny mechanisms and plans to introduce faceless tax assessments, tighten enforcement and improve compliance. “Leakages in liquor sales, undervaluation of properties during registration and weak mining administration all represent significant revenue opportunities. Plugging these leakages will certainly help,” says Dr A Narayanamoorthy, Head of the Department of Economics and Rural Development at Alagappa University and former member of the Commission for Agricultural Costs and Prices (CACP).Finance Secretary M A Siddique believes these administrative reforms could substantially improve collections without increasing tax rates. He also expects significant savings through a transparent procurement model, along with higher mining revenue under a revamped framework (see his interview alongside). Economist and former RBI Governor Dr C Rangarajan also identifies stronger tax administration as a key priority. “Wherever feasible, tax rates can be revised, and strengthening tax administration can also improve collections. Fundamentally, if the economy is growing, tax revenues should also grow. The objective is to improve the revenue-to-GSDP ratio,” he says.Another critical reform area is Tamil Nadu’s large portfolio of public sector undertakings. Many state-owned enterprises, particularly in the power and transport sectors, continue to face mounting debt while generating limited returns. Rangarajan believes improving their operational efficiency should become a priority. “State public sector enterprises contribute relatively little to non-tax revenue. While many of them are required to provide subsidised or free services under government policy, their operational efficiency can still be improved. The govt should examine how these enterprises can make a stronger contribution to overall revenue,” he says.The govt has already directed individual PSUs to prepare restructuring plans, while debt restructuring options are also under consideration, subject to support from the Union govt. Tamil Nadu ranked 13th among 18 major states in NITI Aayog’s Fiscal Health Index 2026, reflecting relatively low capital expenditure, rigid spending patterns and poor expenditure quality. Although welfare spending remains politically and socially important, economists argue that greater emphasis must now be placed on productive investment. “The govt will have to carefully balance welfare expenditure and developmental expenditure. That distinction will become important going forward,” says Rangarajan.The TVK govt has indicated that expanding capital expenditure will remain a priority as fiscal space improves. Experts also argue that improving expenditure quality requires better targeting of welfare schemes. Narayanamoorthy notes that Tamil Nadu’s multidimensional poverty rate has fallen below 5%, making it possible to direct benefits towards households that need them most instead of relying on universal subsidies.“The govt should transparently communicate its fiscal constraints and direct cash support only to genuinely deserving households. Rationalising free bus travel and electricity subsidies is particularly important given the financial position of state-owned enterprises,” he says. Better targeting, he argues, would reduce the need to borrow for recurring expenditure while freeing resources for roads, irrigation, water supply and other long-term infrastructure projects. For the TVK govt, the task ahead is clear: fix the revenue leakages, strengthen governance, reform public enterprises, rationalise expenditure and safeguard capital investment. If implemented effectively, these measures could place Tamil Nadu on a more resilient fiscal path while preserving both growth and welfare commitments.
