K R Shanmugam & Shrabani MukherjeeTamil 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. 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). This trend is significant because, while nominal GSDP growth was at 13% in 2025-2026, the growth of outstanding debt was only 11.5%.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. 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.High debt is not a problem unique to Tamil Nadu. 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%.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. 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. However, this should be treated as a guideline rather than a rigid rule.Whether debt remains manageable depends on how fast the economy grows, how much interest the govt pays and how it controls the gap between income and spending. Economist Henning Bohn’s approach asks whether govts respond to rising debt by improving their finances before interest payments. Economist Olivier Blanchard’s work also highlights the importance of comparing interest rates with economic growth. Therefore, the debt-GSDP ratio should serve as the starting point for fiscal assessment, but it should not be the sole measure.According to the Comptroller and Auditor General, Tamil Nadu’s debt-GSDP ratio of 27% for 2024-2025 was below the indicative ceiling of 29%. Debt stabilization was negative in 2020-2021 and positive since 2021-2022. However, pressure relating to debt servicing and refinancing persist. Interest payments accounted for 21% of revenue receipts in 2024-2025. About 43% of the public debt matures within seven years. Further, 28% of public-debt receipts were used for repayment, while another 34% for revenue expenditure. These trends indicate a stable aggregate debt ratio can coexist with a tightening of fiscal space.This reveals the limitations of the traditional distinction between capital and revenue expenditure. Tamil Nadu’s 2026-2027 budget proposes revenue expenditure of `4 lakh crore and capital outlay of `56,985 crore. The composition of borrowing has also shifted. 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 means a smaller share of borrowing is directly funding new assets.However, accounting classification should not be confused with economic returns. Revenue expenditure that enhances productive capacity can include salaries for teachers and public-health personnel, preventive health care costs, learning support, and the timely maintenance of irrigation systems. Conversely, capital expenditure does not necessarily generate economic returns. A poorly chosen project, an unfinished building or a facility that few people use may bring little benefit.The more useful distinction is between productive and non-productive borrowing. Does the money improve infrastructure, people’s skills and health, technology or the functioning of public institutions? Does it help the economy grow and improve the state’s ability to repay its debt? These are the questions that should guide borrowing decisions.In this context, Tamil Nadu could complement the debt-GSDP ratio with a public debt quality dashboard. First, it should monitor how much of its income goes towards interest payments. The current share of 21% needs close attention, as a growing interest bill could leave less money for development even if the debt ratio stays within the prescribed limit.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.Third, the dashboard should show how much debt falls due within five to seven years. If a large share must be repaid over a short period, the govt may need to borrow heavily again, possibly at higher interest rates. Tamil Nadu’s debt ratio should therefore be assessed with the fact that 43% of its public debt matures within seven years.The goal should go beyond bringing the debt ratio down to the estimated benchmark of 23%. Fiscal consolidation must protect high-return expenditure on health, education, maintenance and productive infrastructure. If borrowing temporarily raises the debt ratio, but generates durable economic and fiscal returns, it can contribute to improved debt sustainability.The fiscal debate in Tamil Nadu must, therefore, move from the quantum of debt to the quality of borrowing. The question is not whether debt stands at 23%, 27% or 29% of GSDP, but whether incremental borrowing supports economic activity, leaves enough income for public services and avoids concentrating repayments in a short period. Tracking the debt ratio, interest costs, repayment schedule and use of fresh borrowing would provide a clearer assessment.The pandemic must also be recognised as an unexpected crisis that increased debt burden across states. Tamil Nadu and other states could ask Centre for a conditional debt-relief or restructuring mechanism to ease or restructure this debt. Such relief should complement, rather than substitute for, improvements in debt management and the quality of public expenditure.(K R Shanmugam is economic consultant with the TN govt; Shrabani Mukherjee is a professor at Alliance University in Bengaluru)
