Sustainable debt-GSDP ratio for Tamil Nadu is 23%, says economic consultant

Amid the ongoing debate on Tamil Nadu's public debt levels, the State government's economic consultant, K.R. Shanmugam, has stated that the sustainable debt-to-Gross State Domestic Product (GSDP) ratio for the State is 23%. This comes as the State's current debt-GSDP ratio stands at approximately 27%.

Mr. Shanmugam, while advocating for a reduction from the existing level, noted that the Fiscal Responsibility and Budget Management (FRBM) Committee headed by former civil servant N.K. Singh in 2017 had prescribed a prudent limit of 20% for States in general. However, he argued that Tamil Nadu could be allowed an additional three percentage points, considering the macroeconomic progress over the past five years.

The economist emphasised that borrowing is not inherently undesirable. It is a major source of financing development projects. When borrowed funds are invested in productive assets and infrastructure that generate economic growth and future income, the government can service its debt with increased income. In such cases, debt is not a problem, he pointed out.

However, when the debt-GSDP ratio exceeds the prudent level, it becomes unsustainable. The burden of debt servicing then becomes excessive for the future, crowding out productive expenditure and potentially pushing the government into a debt trap, which Mr. Shanmugam described as "bad for growth, development and stability."

Acknowledging that the debt issue is widespread across the country, Mr. Shanmugam noted that only three States — Gujarat, Odisha, and Maharashtra — have debt-GSDP ratios below the 20% mark. All other States have crossed the threshold, with nine States — Andhra Pradesh, Bihar, Kerala, Madhya Pradesh, Punjab, Rajasthan, Telangana, Uttar Pradesh, and West Bengal — having higher ratios than Tamil Nadu.

The COVID-19 pandemic significantly impacted Tamil Nadu's debt-GSDP ratio, which rose from 22.78% in 2019-20 to 28.67% in 2020-21 and has since remained in the range of 26% to 28%. While Mr. Shanmugam appreciated the State for keeping its fiscal deficit at 3% of GSDP, he expressed concern that the revenue deficit — the excess of revenue expenditure over revenue receipts — is about 1.4% of GSDP. This indicates that nearly 50% of borrowed funds are spent on consumption rather than investment.

To achieve a sustainable debt-GSDP ratio of 23% by 2050-51, the State would need to maintain 15% nominal economic growth annually and keep the fiscal deficit at 3%. If quicker progress is desired, reducing the fiscal deficit would be necessary. For instance, with a fiscal deficit of 2.5% and nominal economic growth of 14%, the State could reach the 23% ratio by 2033-34.

Mr. Shanmugam strongly advocated for expenditure rationalisation, suggesting that the government should consider dropping outdated and unproductive welfare schemes. More notably, he recommended deferring the ruling Tamilaga Vettri Kazhagam's electoral promise to increase the monthly assistance under the Magalir Urimai Thogai from ₹1,000 to ₹2,500 for all women up to age 60, until fiscal consolidation is achieved.