Curious case of Tamil Nadu where big debt numbers tell the wrong story

A Congress party colleague’s recent post has stirred up quite a debate. The claim is stark, the language urgent, and the conclusion dramatic: Tamil Nadu’s debt situation is “alarming.”

The comparison is eye-catching too. In 2010, Uttar Pradesh had more than double the debt of Tamil Nadu. Today, Tamil Nadu’s outstanding debt is higher than Uttar Pradesh’s. On the face of it, that sounds damning. A single indicator. A clean before-and-after. A tidy verdict.

But public finance is rarely tidy and single-indicator stories, however viral, often hide more than they reveal. I am not about to dismiss concerns on debt. Debt shapes fiscal space, future budgets, and policy choices. However, debt, by itself, is not a moral failing, nor is it a sufficient summary of a State’s economic health. To understand what Tamil Nadu’s numbers actually mean, we need to step back, widen the lens, and place that one indicator inside a larger economic story.

Let us begin where the criticism begins. As of 2025-26, Tamil Nadu’s outstanding debt is estimated at 26.1% of gross state domestic product (GSDP), down from 26.4% in 2024-25 and 26.6% in 2023-24. The State’s debt ratio has been on a gradual downward path since its COVID-19 peak, though it remains above pre-Covid levels.

Uttar Pradesh, by contrast, is estimated to end 2025-26 with outstanding liabilities of 29.4% of GSDP, also declining from 30.8% in 2024-25. U.P. remains more indebted than Tamil Nadu relative to the size of its economy, even though Tamil Nadu’s absolute debt stock is now higher. Tamil Nadu’s economy, at ₹35.7 lakh crore GSDP in 2025-26, is significantly larger per capita than Uttar Pradesh’s ₹30.8 lakh crore economy, despite U.P. having nearly three times the population. Absolute comparisons without denominators make for good headlines, but weak analysis.

What about the interest burden, another charge raised in the post? Tamil Nadu does spend a high share of its revenue receipts on interest payments, about 21% in 2025-26. That places it among the higher-interest-burden States. Yes, interest costs constrain budgets. But no, the numbers do not indicate a debt spiral. In fact, Tamil Nadu’s fiscal deficit is projected at 3% of GSDP in 2025-26, lower than the 3.3% revised estimate for 2024-25, and fully within the Fiscal Responsibility and Budget Management (FRBM) framework. The direction of travel matters as much as the level.

A more meaningful way to assess debt sustainability over the last decade is to step away from headline stock numbers and look instead at the mechanics of debt accumulation. Over the ten-year period from 2012-13 to 2021-22, Tamil Nadu’s average real GDP growth has exceeded its average real effective interest rate by about 2.1 percentage points, while even in the more recent five-year window, which includes the pandemic shock, the growth-interest differential remains positive at 1.3 percentage points. This matters because when growth persistently exceeds the effective cost of borrowing, debt ratios stabilise or decline unless primary deficits are very large, which in Tamil Nadu’s case have been below 2% of GSDP.

So, what distinguishes Tamil Nadu is not that its debt rose, but what happened alongside that rise. Notably between 2020-21 and 2023-24, Tamil Nadu maintained real GSDP growth averaging above 7%, with services and manufacturing consistently expanding. The economy did not stagnate under debt. It expanded through it.

Tamil Nadu’s per capita GSDP in 2023-24 stood at ₹3.53 lakh, more than three times Uttar Pradesh’s ₹1.07 lakh. This reflects decades of higher productivity, industrialisation, and human capital formation. Tamil Nadu is far more urbanised, which matters because it correlates with higher tax capacity, better service delivery, and more diversified employment. Human development indicators reinforce this picture. Tamil Nadu consistently outperforms most States on literacy, health access, and demographic transition. These outcomes reduce long-term fiscal pressures by lowering dependency ratios and improving labour productivity.

Where Tamil Nadu’s story becomes most forward-looking is in investment and economic composition. In 2025-26, Tamil Nadu planned a 22% increase in capital outlays, with especially sharp increases in transport, urban development, and energy. The State has also committed resources to the Tamil Nadu Semiconductor Mission, fintech hubs, R&D ecosystems, and advanced manufacturing. Debt that finances future productivity is not the same as debt that merely fills revenue gaps. The composition of expenditure matters, and Tamil Nadu’s capital-heavy budget tilt suggests an economy still investing its way forward.

There is a deeper political economy question hiding behind the debt debate. Tamil Nadu raises 75% of its revenue receipts from its own resources. 25% comes from its share in central taxes and via grants. Uttar Pradesh, by contrast, depends on the Centre for over half of its revenue receipts. This reflects stronger tax bases, higher compliance, and denser economic activity in Tamil Nadu.

Yet, fiscal debates cannot ignore past performance, present capacity, and fiscal transfers. States that industrialised early, invested in human development, and controlled population growth, now face tighter borrowing constraints and lower transfers, even as they continue to contribute disproportionately to national growth and tax collections. If debt alone becomes the yardstick, the incentive structure gets inverted. Good performance gets punished, and catch-up States get permanent support with little accountability. That is not cooperative federalism. It is a recipe for discord.

One indicator can spark a debate. It cannot settle it. The real story is not about who overtook whom on a debt chart. It is about what States did with their borrowing, what economies they built, and what futures they are financing. On that score, Tamil Nadu’s story remains far more resilient, and far more relevant, than a single line on a graph would have us believe.

Salman Soz is a member of the Indian National Congress and co-author of ‘Unshackling India: Hard Truths and Clear Choices for Economic Revival’. Views expressed are personal.