Amid the raging debate over Tamil Nadu’s level of public debt, economic consultant to the State government, K.R. Shanmugam, says the sustainable level of the debt-gross state domestic product (GSDP) ratio for the State is 23%.

Arguing the case for the reduction of the level from the existing 27%, Mr. Shanmugam says though the Fiscal Responsibility and Budget Management (FRBM) Committee headed by former civil servant N.K. Singh, in its report prepared in 2017, prescribed 20% as the prudent limit for the States in general, an allowance of an additional three percentage points can be provided for Tamil Nadu, considering the progress of macroeconomic factors in the last five-odd years.

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Emphasising that borrowing, per se, is not an undesirable activity, the veteran economist says it is one of the major sources of financing development projects. “When borrowed funds are invested in productive assets and infrastructure that generate economic growth and future income, the government will be able to service its debt with increased income. In such a case, the debt is not at all an issue,” he points out.

However, when the debt-GSDP ratio exceeds the prudent level, it becomes unsustainable, and the burden of debt servicing becomes excessive for the future, crowding out productive expenditure and pushing the government into a debt trap – a situation that is “bad for growth, development and stability,” Mr. Shanmugam observes.

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Conceding that the debt issue is widespread in the country and not confined only to Tamil Nadu, he says only three States – Gujarat, Odisha, and Maharashtra – have debt-GSDP ratios below the 20% mark. While all others have crossed the threshold, nine States – Andhra Pradesh, Bihar, Kerala, Madhya Pradesh, Punjab, Rajasthan, Telangana, Uttar Pradesh, and West Bengal – have higher ratios than that of Tamil Nadu.

Pandemic effect

Like in most other States, the debt-GSDP ratio in Tamil Nadu shot up in the COVID-19 pandemic year (2020-21), from which it has not been able to stage a comeback. In 2019-20, it was 22.78%. The next year, it rose to 28.67%. It has been hovering in the range of 28% to 26% since then.

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Though appreciative of Tamil Nadu for being able to keep its fiscal deficit at 3% of the GSDP, Mr. Shanmugam is concerned that the revenue deficit (the excess of revenue expenditure over revenue receipts) is about 1.4% of the GSDP, which means that nearly 50% of the borrowed money is spent on consumption and not on investment.

The way forward

To reach the sustainable level of a debt-GSDP ratio of 23% around 2050-51, the State should achieve 15% nominal economic growth annually and keep the fiscal deficit at 3%. If it wants to attain the level faster, it should, at least, reduce the fiscal deficit. For example, assuming the State is able to keep the fiscal deficit at 2.5% with 14% nominal economic growth, it can reach 23% by 2033-34.

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Strongly advocating expenditure rationalisation, Mr. Shanmugam adds that the government should not hesitate to drop outdated and unproductive welfare schemes. More importantly, it should avoid implementing the ruling Tamilaga Vettri Kazhagam’s main electoral promise of increasing the monthly assistance amount under the Magalir Urimai Thogai from the existing ₹1,000 to ₹2,500 for all women up to the age of 60 until fiscal consolidation is achieved.