Tamil Nadu’s Fiscal Landscape Post‑2024 Election

Tamil Nadu Budget 2024‑25: Growth Gains, Rising Debt and MSME Role

Tamil Nadu’s new Finance Minister N. Marie Wilson will table the state’s first budget under the Tamilaga Vettri Kazhagam (TVK) on Wednesday. The document arrives amid a three‑year growth surge that has outpaced three of India’s other largest economies, yet it also shows the state’s debt climbing to 27.5 % of Gross State Domestic Product (GSDP). How the TVK government balances expanding welfare promises with a widening fiscal gap will hinge on tapping the state’s robust MSME sector.

The interim white paper released by the new administration blames the previous DMK government for “emptied the treasury”, citing higher borrowings and a stagnant own‑revenue base. While total state revenue rose modestly, central transfers fell for the second consecutive year, reflecting the termination of the GST Compensation Cess in 2022‑23.

• ▸State‑own tax revenue (SOTR) fell to 5.8 % of GSDP in 2024‑25, down from 8.3 % in 2012‑13.
• ▸Central transfers contracted from 2.7 % of GSDP in 2011‑12 to 2.2 % in 2024‑25.
• ▸The GST Compensation Cess, introduced to offset the revenue loss from the Goods and Services Tax (GST), was discontinued in 2022‑23.

These figures illustrate a fiscal squeeze: revenue growth is outpaced by the pace of economic expansion, limiting the state’s capacity to fund its ambitious welfare agenda without further borrowing.

Growth Trajectory of Tamil Nadu vs Other Major States

Between 2021‑22 and 2025‑26, Tamil Nadu widened its GSDP gap with Gujarat from 8 % to 18 %, while its share of Maharashtra’s economy rose from 66 % to 69 %. Moreover, it is the only one among the five largest states whose constant‑price growth rate has consistently risen post‑COVID‑19, whereas Maharashtra, Karnataka, Uttar Pradesh and Gujarat have seen stagnation or decline.

• ▸Tamil Nadu’s GSDP grew at an average annual rate of 7.2 % (2021‑22 to 2025‑26).
• ▸Maharashtra’s growth averaged 5.9 % over the same period.
• ▸Gujarat’s GSDP increased by 4.3 % while its share of the national economy fell.

The upward trend underscores a competitive advantage, but sustaining it will require a broader tax base and disciplined fiscal management.

Debt Dynamics and Revenue Pressures

Tamil Nadu’s outstanding liabilities, which include market borrowings, centre‑granted loans and public‑account liabilities, have risen sharply. The Debt-to-GSDP ratio jumped from 17.9 % in 2014‑15 to 27.5 % in 2024‑25, making it the highest among the five large states after Uttar Pradesh’s ratio slipped to 26.5 %.

• ▸Internal debt (market borrowings) accounts for 55 % of total liabilities.
• ▸Loans from the centre represent 30 % of the debt portfolio.
• ▸Public‑account liabilities, such as provident‑fund balances, comprise the remaining 15 %.

A higher debt burden raises borrowing costs and limits fiscal space, compelling the TVK government to explore non‑tax revenue streams and efficiency‑driven reforms.

MSMEs: Engine of Growth and Fiscal Resilience

The Micro, Small and Medium Enterprises (MSMEs) sector remains a pivotal lever for Tamil Nadu’s revenue mobilisation. Defined by the Ministry of MSMEs, “micro” enterprises have investment up to ₹25 lakh and turnover up to ₹5 lakh; “small” enterprises up to ₹2 crore investment and ₹10 crore turnover; “medium” enterprises up to ₹10 crore investment and ₹50 crore turnover. Registration under the Udyog Aadhaar Memorandum 2015 confers legal identity, enabling access to credit and eligibility for state schemes.

• ▸MSMEs contribute ≈ 30 % of India’s GDP, yet generate only ≈ 5 % of total exports.
• ▸The sector employs 119 million workers (FY 2022‑23), representing 12 % of the national workforce.
• ▸Formal MSMEs account for 5 % of total enterprises, highlighting a large informal base.

By expanding the MSME base and encouraging formalisation, Tamil Nadu can broaden its tax net, reduce reliance on central transfers, and cushion the impact of rising debt.

Policy Options for the New Government

To reconcile growth ambitions with fiscal prudence, the TVK administration may consider three strategic avenues. First, incentivising MSME formalisation through targeted credit guarantees and simplified compliance under the Udyog Aadhaar Memorandum 2015. Second, revisiting the state’s tax structure to raise the State Own Tax Revenue (SOTR) share of GSDP, perhaps by expanding the sales‑tax net on high‑value services. Third, prudently managing the Debt-to-GSDP ratio by issuing market‑linked bonds with longer maturities, thereby lowering annual interest outlays.

• ▸Introduce a “MSME Growth Fund” of ₹5,000 crore to support technology adoption.
• ▸Raise SOTR to 7 % of GSDP by 2027 through a phased expansion of the sales‑tax base.
• ▸Issue green bonds to finance renewable‑energy projects, aligning debt with sustainability goals.

These measures could sustain the growth momentum while averting a fiscal crunch, ensuring that Tamil Nadu’s economic narrative remains one of resilience and inclusive development.