Tamil Nadu, the fastest growing state in 2024-25, is facing mounting fiscal challenges. These include widening deficits and difficulties in bolstering its own tax revenues. While the interim budget presented by Finance Minister Thangam Thennarasu projected the nominal gross state domestic product to rise 14.5 percent to ₹40.67 lakh crore in 2026-27, it revealed significant strains in fiscal health. The fiscal deficit was raised to 3.48 percent of GSDP in the revised estimate for 2025-26, up from the budget estimate of 3 percent. The revenue deficit has gone up sharply for the current year from a budgetary estimate of 1.2 percent to a revised estimate of 1.9 percent. The state’s own tax revenue (SOTR) for 2025-26 fell short by ₹14,355 crore against the target of ₹2,20,895 crore. The outstanding debt increased marginally to 26.43 percent of GSDP.
The finance minister has squarely blamed New Delhi for the financial stress, citing the GST rate rationalisation which cost the state ₹9,600 crore, an unexpected ₹1,709-crore integrated GST deduction, and a ₹1,202-crore cut in the state’s share of central taxes. The ₹9,500 crore paid by Tamil Nadu to cover for the Centre’s share of Chennai Metro Phase II remains on the state’s books. GST being the largest share of SOTR, the rate rationalisation implemented last year had a significant impact. The minister also criticised the 16th Finance Commission for retaining the states’ share in the divisible pool of taxes at 41 percent despite the growing chorus for a higher share. Further, Tamil Nadu has accused the Centre of denying infrastructure approvals, withholding funds under centrally-sponsored schemes, reducing tax revenues without consultation and imposing arduous spending conditions.
Despite noting these headwinds, the minister expressed optimism for fiscal improvement in 2026-27. His hopes rest on stronger revenue projections, both in its own tax and non-tax revenues and the share of central taxes; he has predicted SOTR to grow from ₹2.07 lakh crore in the current year to ₹2.3 lakh crore in 2026-27. The state government, which is making higher allocations for social welfare measures as an investment to empower the marginalised and the needy, must prioritise revenue enhancement. It must revert to its core strategies for bolstering tax compliance and administrative efficiency to meaningfully grow its own kitty.