Tamil Nadu's sustainable debt ceiling pegged at 23% of GSDP
K.R. Shanmugam, economic consultant to Tamil Nadu, says the state's sustainable debt-GSDP ratio is 23%, above the 20% FRBM norm, and urges fiscal consolidation.
Amid the ongoing debate over Tamil Nadu's public debt, the state government's economic consultant, K.R. Shanmugam, has stated that a debt-to-GSDP ratio of 23% is sustainable for the state. This is three percentage points above the 20% prudent limit prescribed for states by the N.K. Singh-led FRBM Committee in 2017.
Shanmugam argues that the additional allowance is justified given the state's macroeconomic progress over the past five years. He clarifies that borrowing itself is not problematic, as it is a key source for financing development. When funds are invested in productive assets and infrastructure, the resulting economic growth generates income to service the debt.
However, he warns that exceeding the prudent level makes debt unsustainable. Excessive debt servicing can crowd out productive expenditure and potentially trap the state in a debt cycle, which is detrimental to growth and stability.
The debt issue is not unique to Tamil Nadu. Only Gujarat, Odisha, and Maharashtra currently have debt-GSDP ratios below 20%. Nine other states, including Andhra Pradesh, Kerala, Punjab, and West Bengal, have higher ratios than Tamil Nadu.
Tamil Nadu's debt-GSDP ratio spiked to 28.67% during the pandemic year of 2020-21 from 22.78% the previous year and has remained elevated between 26% and 28% since. While the state has kept its fiscal deficit at 3% of GSDP, Shanmugam expresses concern that a revenue deficit of 1.4% of GSDP indicates nearly half of borrowed funds are used for consumption rather than investment.
To reach the 23% target by 2050-51, the state would need 15% annual nominal economic growth while maintaining a 3% fiscal deficit. A faster timeline is possible with a lower deficit; for instance, a 2.5% fiscal deficit with 14% growth could achieve the target by 2033-34.
Shanmugam recommends rationalising expenditure, including dropping outdated welfare schemes. He specifically advises against implementing the ruling party's promise to double the Magalir Urimai Thogai monthly assistance from ₹1,000 to ₹2,500 for women until fiscal consolidation is achieved.