The Government of Tamil Nadu’s white paper is a comprehensive analysis of the State’s financial status and economic conditions. Detailed like the white paper prepared by the DMK in 2021, the TVK’s 120-page document begins with an important line: ‘it is neither an exercise in retrospective blame nor a political statement’. In that spirit, this is a genuine exercise. It indeed offers an honest account of what went wrong with tax collection: a shrinking base and leakages embedded in both revenue collection and expenditure patterns. While its diagnosis is rigorous, what is not clear, however, is how the government is going to fix the leakages and manoeuvre the welfare that it has promised during its election campaign.

The white paper lays bare the structural weaknesses facing Tamil Nadu’s economy and the possible course correction which in that sense has a lot more continuity with the earlier one submitted by the DMK. Both literally state that “the current levels of fiscal deficit are unsustainable primarily because a substantial portion of the fiscal deficit is simply to fund the revenue deficit”. It means the State is simply borrowing to fund current consumption rather than to create assets. To be sure, for every rupee borrowed about 60 paise goes to current consumption. But one has to be cautious of reading of too much of this as substantial expenditure for health and education are under the revenue account.

In an economy, the government needs to raise resources to pay for the provision of public goods and services, build social and physical infrastructures needed for growth and protect the vulnerable from the market forces. In that sense, every policy is a political choice with losers and gainers not just within the present generation but also of across generations since public debt shifts the burden of payment to future governments. The white paper says that the State is deep in debt and its fiscal deficit is beyond the prescribed limit. On average, an individual ₹38,000 in all taxes to the State and the Union government and receives about ₹54,500 worth of subsidies and services. The gap is typically funded by borrowing. The consolidated debt of each individual is then around ₹1.29 lakh, and the cumulative debt is about 28% of the State income, which is the cause for concern today.

Collapse of revenue generation

The serious concern that the report flags is not just debt but of the collapse of the revenue generation itself. While the white paper shows the account of revenue generation of the past five years, the collapse precedes this by at least a decade. Make no mistake, Tamil Nadu was one of the few States that predominantly sustained itself on its own revenue for its expenditure – about 70% of its expenditure from its own tax in sharp contrast to States such as Bihar and Uttar Pradesh which largely rely on the Centre’s transfer. With the introduction of the GST in 2017, States have lost their sovereignty on taxation. Tamil Nadu suffered the most. The State’s Own Tax Revenue (SOTR) to GSDP, which was 7.92% in 2011-12, has been steadily declining, and was down to 5.93% in 2021-22 and further down to 5.45% in 2025-26.

While the white paper clearly shows that the decline is spread across all major tax heads — GST, petroleum VAT, State excise, stamp duty and motor vehicle tax, the GST alone accounts for about 53% total tax revenue. Despite having the second largest economy with the size of ₹35.29 lakh crore of GSDP, its GST collection was ₹72,008 crore lower than that of Karnataka (₹87,256 crore), and Gujarat (₹80,823 crore). Beside the systemic corruption and inefficiencies in tax collection, predominance of the service sector also contributed to the decline in GST collection. It appears many units within the sector are beyond the tax net.

Similarly, motor vehicle tax collection has not kept pace since the number of vehicles registered in the State has not kept up. Not to mention stamp duties in rent-seeking sectors such as real estate which is known for undervaluation of the property at registration and excessive leakages and corruption. Even mining revenue is among the most striking examples of stagnation in non-tax income. Besides corruption in valuation, leakage in the assessment of minor mineral extraction also contributed to the decline. The key sectors that drive the State in this debt trap are the power sector and transport. The power sector alone carries ₹2.47 lakh crore of debt. The State has historically built progressive power subsidy model – taxing industries and paying for poor and farmers which has become sites of political rent-seeking tied to electoral cycles.

Lost tax sovereignty and Union transfer

Beside the steady decline in its own tax collection, the State has also been increasingly losing its share in the Union transfer. For instance, Union tax devolution and grants-in-aid together constituted about 34.95% of Total Revenue Receipts in 2021-22 and it declined to 25.5% in 2025-26. Again, this decline precedes a decade. The State’s share in total transfer was 5.305% in the 12th Finance Commission period, but it came down to 4.969% in the 13th Finance Commission period and fell down to 4.023% for the 16th Commission.

This declining share is due to the formula adopted by the successive Finance Commissions. The high weightage to the per capita income distance combined with population has disadvantages. The State has become a victim of its success. Even the weight GDP contribution introduced in the 16th Finance Commission did not help as the formula was inverted. Neither the criteria of area nor forest cover could help.

On the other hand, the sharable divisible pool has been shrinking thanks to the arbitrary cess and surcharges imposed by the Union government that takes away the legitimate resources of the States. In that sense, the State is a victim of both vertical and horizontal distribution. With declining Union transfers and the erosion of its own revenue base, Tamil Nadu’s government size, measured by total expenditure as a share of GSDP, has shrunk, weakening the State’s fiscal capacity. This together limits the State’s ability to intervene in the economy. As the white paper shows, that about 64% of every rupee of revenue receipts in 2025-26 is pre-committed on the account of salaries, pensions and interest. With the inflexible non-discretionary obligations of 23% per cent, this pre-committed expenditure goes up to 87% leaving little room for any additional expenditure or any new schemes. Global uncertainty or any exogenous shock could make the economy paralysed.

Debt, demography and scissors effect

This potential debt trap also comes at a time when the State is witnessing faster demographic change. It’s aging faster than any other large State in India. Tamil Nadu’s median age is 34.25 years — nearly 9.5 years older than Uttar Pradesh and its old-age dependency ratio is projected to increase from 20.6 in 2021 to 32.7 by 2036. This has two implications. The ability to repay the debt is limited, the paper argues, because a shrinking working-age population means a shrinking tax base. It also means the need for higher social expenditure as the share of elderly population goes up. The interaction between a rising debt stock and a shrinking working-age population can create condition for a debt trap which demographers call ‘scissors effect’ — the widening gap between revenue capacity and expenditure obligations.

However, Tamil Nadu’s problem today is not fiscal profligacy or corruption. The pressing problem is its model of inclusive growth itself. The real challenge thus is getting investment, generating decent jobs, improving wages, while actively renegotiation fiscal space with the Union. The welfare architecture that the State has built is not enough. Educated youth who rallied behind the TVK are not seeking more welfare, but decent jobs and wages. Welfare can’t be a substitute for jobs and wages. It is time to get the growth fundamentals right, which require investment in education, health, and public infrastructure. Chief Minister Joseph Vijay thus has the enormous responsibility not only to put the inclusive growth model back on track, but also to reclaim fiscal autonomy from the Union.