Debt is usually the most-talked-about word in Tamil Nadu politics at the time of elections, and is mostly forgotten until the next elections.

An audit of the State Finances for a single year – 2024-25 – by the Comptroller and Auditor General (CAG) of India, especially on fiscal sustainability, has given a few insights into what the new government led by Tamilaga Vettri Kazhagam (TVK) will encounter in the coming years.

According to the CAG report, the total outstanding public debt of the State increased significantly, by 309%, during the decade from 2015-16 to 2024-25, rising from ₹1,94,096 crore to ₹7,94,107 crore. During 2024-25 alone, the outstanding public debt increased by 15.16%, with internal debt constituting the major portion of the increase.

[Total liabilities of the State government typically constitute the Internal Debt of the State (market loans, ways and means advances from the RBI, special securities issued to the National Small Savings Fund and loans from financial institutions, etc.), loans and advances from the Central government, and Public Account Liabilities.]

In fact, the internal debt increased by nearly 3.69 times over the last 10 years, while the corresponding repayment increased by about 6.70 times during the same period. The audit observed that the increase in the repayment burden was attributable to moratoriums on loans availed of in previous years, coupled with the servicing of accumulated past debt.

Further, it was observed that the interest paid during the year 2024-25 amounted to ₹48,852 crore, which exceeded the repayment of the principal amounting to ₹38,470 crore. This reflects the rising level of committed expenditure arising from the State’s debt obligations.

Utilisation of borrowed funds

Borrowed funds should ideally be used to fund capital creation and developmental activities. Using borrowed funds for meeting current consumption and repayment of interest on outstanding loans is not a healthy trend, the CAG pointed out. In the audited year, a substantive portion of borrowed funds (public debt) was utilised towards revenue expenditure (34%) and repayment of debt (28%), leaving less fiscal space for capital creation and developmental activities.

That a large chunk of debt (around 43%) is scheduled for repayment within a relatively short to medium term (0-7 years) indicates increasing liquidity pressure on the State. This might create an overwhelming fiscal obligation in later years, which could compel the State to rely heavily on fresh borrowings during such years, the CAG has cautioned.

Debt servicing

The audit further observed that a substantial portion of the State’s gross borrowings continued to be utilised for the repayment of existing debt. This indicates that a significant share of new borrowings was used for debt rollovers rather than for financing productive capital expenditure, resulting in lower net availability of borrowed funds. Such a pattern constrains the State’s capacity to undertake new developmental projects and increases the risk of entering a debt-servicing cycle instead of supporting productive investment.

The ratio of interest payments to revenue receipts, which measures the affordability of debt servicing, increased to 21.18% during 2024-25. The rising level of debt servicing costs will be a matter of concern, the CAG pointed out.

In the last five years, debt stabilisation was negative only in 2020-21. From 2021-22 onwards, it turned positive and remained so through 2024-25. The positive debt stabilisation reflects a decline in the debt-to-GSDP ratio and indicates that the State is presently in a stable position with respect to its debt repayment capacity.

Pathway to fiscal stability

According to the CAG, deficits can be improved by enhancing revenues and rationalising expenditures, which includes strengthening tax compliance, widening the tax base, revising user charges, and monetising idle government assets.

On the spending side, better targeting of subsidies, controlling salary and pension growth, and ensuring proper classification of expenditure are key factors. Prioritising productive capital investment and improving debt management through transparent and efficient borrowing can further ease fiscal pressure, the CAG pointed out.