A post-poll fiscal reality check: TN and Kerala face rising debt pressure

New governments in Tamil Nadu and Kerala have released white papers on state finances, but economists say debt figures alone do not capture the full fiscal picture

Two southern states, led by newly elected governments seeking to present a clean break with the past, have opened their books to the public with detailed white papers on their respective fiscal health. 

The numbers are significant: Tamil Nadu’s outstanding debt stands at ₹13.18 trillion, while Kerala’s debt burden is estimated at ₹5.07 trillion. On the surface, the figures suggest mounting fiscal pressure. But economists and policy experts argue that the headline numbers alone do not capture the full picture — the structure of spending, the nature of liabilities and the economic models of these states matter just as much. 

For both Tamil Nadu Chief Minister C Joseph Vijay and Kerala’s V D Satheesan, releasing a white paper was among the early commitments after taking charge. Such disclosures have become a common feature in Indian politics, with incoming governments often using them to highlight the financial challenges inherited from previous administrations. 

Beyond TN’s debt numbers 

Tamil Nadu’s fiscal position has emerged as a key point of discussion after the state’s white paper highlighted rising debt, higher committed expenditure and a widening revenue deficit. 

Palanivel Thiaga Rajan, who was the state’s finance minister during the previous Dravida Munnetra Kazhagam (DMK)-led government, questioned the timing of the document. “A new government, and they have a first-time MLA as finance minister. Still, why did a white paper come within one month? That itself is suspicious to me,” he told Business Standard. 

Tamil Nadu’s debt was estimated at around 28.3 per cent of gross state domestic product (GSDP), above the 25 per cent threshold under the fiscal responsibility framework. This compares with Gujarat at 17.6 per cent, Maharashtra at 19.7 per cent and Karnataka at 23.4 per cent. The report noted that direct debt had almost doubled over five years, rising from ₹5.13 trillion to around ₹10 trillion. However, economists argue that inter-state comparisons need to consider differences in policy choices and development models. “Tamil Nadu and Kerala have higher social sector spending, larger government workforce, pension liabilities and extensive public health and education infrastructure. Fair assessment needs adjusted metrics accounting for these varying economic models and priorities,” said Lekha Chakraborty, professor at the National Institute of Public Finance and Policy. 

Tamil Nadu’s committed expenditure — including salaries, pensions and interest payments — increased from ₹1.25 trillion to ₹1.89 trillion. Its share of revenue receipts rose from around 60 per cent to 64 per cent, higher than the levels maintained by several comparable states. An industry expert noted that this comparison also reflects differences in the size of government employment. Tamil Nadu has around 1.7 million salaried government employees and pensioners, compared with approximately 900,000 in Gujarat, 1.4 million in Maharashtra and around 1.2 million in Karnataka. 

In 2025-26, Tamil Nadu’s revenue deficit was roughly 2.5 times that of Karnataka or Maharashtra, while Gujarat recorded a surplus. 

Finance Minister N Marie Wilson highlighted the debt burden on population, stating that every child born in Tamil Nadu carries an implied debt burden of ₹1.29 lakh, higher than in peer states. 

The white paper noted that Tamil Nadu’s revenue deficit increased to ₹78,324 crore from ₹46,538 crore in 2021-22. It also stated that the state added ₹4.87 trillion in new debt in recent years, exceeding the borrowing accumulated over the previous six decades. 

The DMK leadership has projected that if the Tamilaga Vettri Kazhagam (TVK)-led government completes its five-year term, the state’s debt could rise to ₹20 trillion. The Opposition has argued that the new government will face the challenge of balancing election commitments, continuation of existing welfare programmes and fiscal consolidation. 

Thiaga Rajan stressed the state’s fiscal condition remained strong during the DMK rule. “In two years, I’ve brought more structural reforms than in the 20 years since 2003. Tamil Nadu actually didn’t go into recession at all during Covid, and grew by 0.7 per cent, whereas Maharashtra, Gujarat and Karnataka went into recession,” he said. 

Despite the concerns around debt levels, industry observers point to Tamil Nadu’s broader industrial base, investment pipeline and gro­wth potential as factors that could support future revenue generation. 

Kerala’s fiscal challenge 

Kerala’s white paper presents a different fiscal picture, describing the state’s challenge as a structural issue rather than a temporary imbalance. The state’s outstanding debt was est­imated at approximately ₹5.07 trillion, or around 35.5 per cent of GSDP. 

A key concern highlighted in the report was the high share of committed expenditure. Salaries, pensi­ons, retirement benefits and int­e­rest payments account for around 80 per cent of revenue rec­eipts. This leaves limited room for spending on sectors such as healthcare, education, agriculture, local governments and capital projects. Kerala’s capital expenditure was estimated at 1.3 per cent of GSDP. 

While some economists have raised concerns over the sustainability of Kerala’s debt level, others argue that the state’s borrowing capacity should be viewed within the larger framework of fiscal policy. 

S Adikesavan, a Kerala-based commentator on banking and public finance, said states require greater flexibility under fiscal responsibility norms. “If we look at the ₹5 trillion debt of Kerala with apprehension, what about the ₹214 trillion debt of the Centre? Should we not reckon the per capita impact of that debt too for Keralites?” he said, and argued that infrastructure-led development requires public investment and that fiscal deficit rules should allow room for productive expenditure. 

The Centre’s recent fiscal approach has also involved significant infrastructure spending. Since 2021-22, allocations have increased for highways, railways, ports and other projects. In the 2026-27 Budget, infrastructure spending remained above 3 per cent of GDP. 

“This has been facilitated largely by deficit financing with flexibility over the deficit norm. As per the Fiscal Responsibility and Budget Management (FRBM) legislation, the fiscal deficit target for both the Centre and the states is 3 per cent. It is arguable that the Centre’s higher allocation for infrastructure was facilitated by a less-doctrinaire view of deficit norms,” Adikesavan said. 

He added that this approach supported economic growth. While the Centre’s fiscal deficit has declined from post-Covid levels above 9 per cent, it remained around 4.5 per cent at the latest count, suggesting a continued debate on the appropriate balance between fiscal discipline and development spending. 

Kerala also faces structural vulnerabilities due to its dependence on remittances, which exposes the economy to external changes, including shifts in Gulf economies and demographic trends. “Kerala should focus on diversifying into green infrastructure, tourism, IT and manufacturing while controlling wasteful public expenditure,” Chakraborty said.