Tamil Nadu’s Debt Trajectory in 2025

Changing Debt Rankings Among Major States

Tamil Nadu’s Debt Trajectory in 2025: In 2010, Uttar Pradesh carried more than double the debt of Tamil Nadu in absolute terms. Over time, this position has reversed, with Tamil Nadu’s outstanding debt stock now higher than that of Uttar Pradesh. However, absolute debt figures alone do not reflect fiscal stress accurately.

A more meaningful indicator is debt relative to economic size. As of 2025-26, Tamil Nadu’s outstanding debt is estimated at 26.1% of GSDP, declining from 26.4% in 2024-25 and 26.6% in 2023-24. This shows a clear post-pandemic consolidation trend.

Debt Sustainability and Relative Position

Tamil Nadu’s debt ratio has steadily declined since its COVID-19 peak, though it remains above pre-pandemic levels. By contrast, Uttar Pradesh’s liabilities are projected at 29.4% of GSDP in 2025-26, also falling from 30.8% in 2024-25.

Despite Tamil Nadu having a higher absolute debt stock, U.P. remains more indebted relative to its economic capacity. This distinction is crucial for evaluating fiscal sustainability rather than headline numbers.

Static GK fact: Debt sustainability is commonly assessed using the debt-to-GSDP ratio, not absolute debt, as it reflects repayment capacity.

Economic Size and Per Capita Strength

Tamil Nadu’s GSDP in 2025-26 is estimated at ₹35.7 lakh crore, compared to Uttar Pradesh’s ₹30.8 lakh crore, even though U.P. has nearly three times the population. This difference highlights Tamil Nadu’s stronger per capita economic base.

In 2023-24, Tamil Nadu’s per capita GSDP stood at ₹3.53 lakh, over three times higher than Uttar Pradesh’s ₹1.07 lakh. This gap reflects long-term advantages in productivity, industrialisation, and human capital formation.

Interest Burden and Fiscal Discipline

Tamil Nadu spends a relatively high share of its revenue receipts on interest payments, estimated at about 21% in 2025-26. This places it among states with a higher interest burden, limiting fiscal flexibility in the short term.

At the same time, the fiscal deficit is projected at 3% of GSDP in 2025-26, lower than the 3.3% revised estimate for 2024-25. This remains fully within the FRBM framework, indicating adherence to fiscal rules.

Static GK Tip: The FRBM framework aims to ensure long-term fiscal discipline by limiting deficits and debt accumulation.

Growth-Interest Differential Advantage

Between 2012-13 and 2021-22, Tamil Nadu’s average real GDP growth exceeded its real effective interest rate by about 2.1 percentage points. Even during the five-year period including the pandemic, this differential remained positive at 1.3 percentage points.

When growth consistently exceeds borrowing costs, debt ratios tend to stabilise or decline, provided primary deficits remain moderate. In Tamil Nadu’s case, primary deficits have stayed below 2% of GSDP.

Investment-Led Debt and Revenue Strength

From 2020-21 to 2023-24, real GSDP growth averaged above 7%, driven by sustained expansion in services and manufacturing. The economy expanded alongside borrowing rather than stagnating under it.

In 2025-26, Tamil Nadu planned a 22% increase in capital outlays, signalling an emphasis on productivity-enhancing expenditure. Debt used for capital creation differs fundamentally from debt used to finance revenue gaps.

Tamil Nadu raises about 75% of its revenue receipts from own sources, with only 25% coming from central taxes and grants. This contrasts with Uttar Pradesh’s heavy dependence on central transfers, exceeding 50% of revenues.

Structural Advantages and Long-Term Outlook

Higher urbanisation, stronger tax compliance, and better human development outcomes support Tamil Nadu’s fiscal capacity. Superior performance in literacy, health access, and demographic transition reduces long-term fiscal pressures.

The state’s debt story is ultimately about how borrowing is used, the economic structure built over decades, and the future productivity being financed, rather than debt levels alone.

Static Usthadian Current Affairs Table

Tamil Nadu’s Debt Trajectory in 2025: