Flawed subsidy targeting, discoms trigger fiscal strain for Tamil Nadu

State's outstanding debt and liabilities reached almost ₹10 trillion in FY26

Tamil Nadu’s debt burden is outpacing economic peers like Karnataka, Maharashtra and Gujarat, according to a financial white paper released by Chief Minister C Joseph Vijay’s new government. The data shows that the state's power sector is driving the fiscal strain.

 

Tamil Nadu’s outstanding debt and liabilities reached almost ₹10 trillion in FY26 — nearly double the FY21 level. The debt-to-gross state domestic product (GSDP) ratio was 28.3 per cent in FY26 — among the highest within large states.

 

The state has rising contingent liabilities — in the form of government guarantees and financing of loss-making public sector undertakings — worth ₹1.8 trillion in FY26. That is thrice the amount in FY21, causing the guarantee-to-GSDP ratio to rise from 3.7 per cent in FY21 to 5.1 per cent in FY26. The guarantee-to-debt ratio has also increased from 12.8 per cent to 18 per cent in the same time period.

 

Power sector entities in Tamil Nadu alone constituted nearly 80 per cent of the state’s guarantees in FY26. Such guarantees accounted for nearly 4 per cent of the GSDP and 14 per cent of the total state debt. Further, the power sector entities’ outstanding debt was 25 per cent of the state’s total debt in FY26.

 

The power sector was one of the primary reasons behind Tamil Nadu’s deteriorating fiscal position. The state provides free electricity up to 100 units “bimonthly” regardless of total consumption. However, the poor targeting of the free electricity subsidy is taking a toll on finances. Tamil Nadu provided free electricity to 89.5 per cent of its population, followed by Punjab (82.9 per cent) and Karnataka (81.4 per cent). Furthermore, 85.2 per cent of the richest quintile group and 93.2 per cent of the second-richest quintile group received free electricity in the state, a rate much higher than in other states. 

 

In FY24, Tamil Nadu’s share in aggregate losses of all state-owned distribution companies (discoms) was the highest at 24 per cent, followed by Uttar Pradesh (UP) and Rajasthan at 13 per cent each. Tamil Nadu’s discom losses accounted for 6.6 per cent of its GSDP — the highest rate among all states in FY24. 

 

Tamil Nadu provided power subsidies worth nearly ₹32,098 crore in FY24 — the second highest behind UP (₹33,384 crore). However, in per capita terms, Tamil Nadu gave a greater subsidy amount than UP due to the southern state’s smaller population. 

 

The Average Cost of Supply-Average Revenue Realised (ACS-ARR) gap, after excluding the loss funding provided by the state, remains high for Tamil Nadu, although it has declined from ₹2.4 per unit in FY22 to ₹1.6 in FY26. To revive the state’s finances, the government needs a better strategy to target its power subsidies.