Tamil Nadu’s Budget for FY26 is a mixed bag of positives and negatives. Its capital expenditure thrust falls in the first category, but its subsidy bill and a suggestion of opacity in its deficit estimates fall in the second. On the first, infrastructure development has received a large allocation of ₹57,231 crore for FY26, registering a 22 per cent jump over the revised estimate for FY25, accounting for 13 per cent of the Budget (₹4.39 lakh crore).
Expenditure on a new global city near Chennai, roads and bridges, urban transport and energy, water supply and rural housing is to be welcomed, as improved infrastructure will improve the State’s attractiveness as an investment destination. But the State must ensure that it meets its budgeted capex target for FY26; it failed to meet the targets in FY24 and FY25. Nevertheless, this focus is significant, as investment in infrastructure had taken a backseat after the pandemic. That said, the State must address bloating revenue expenditure. At ₹3,73,204 crore for FY26, revenue expenditure is 6.50 times its capex. This is much above the revenue expenditure to capital outlay (RECO) ratio of 5.2 per cent for all States in FY25, according to Reserve Bank of India (RBI). The State has a large share of committed expenditure with salaries and pension accounting for more than one-third of its revenue expenditure and interest payments accounting for 19 per cent. Further, subsidies and grants amounted to ₹1,53,724 crore in FY26, going towards schemes such as free bus travel for women, monthly transfer of ₹1,000 to 1.15 crore women, mid-day meals and breakfast at schools and skill training. While many of these schemes are generating a social dividend, the State needs to prune those which are not.
The fiscal deficit for FY26 has been reined in at 3 per cent of GSDP, down from 3.26 per cent in FY25, a figure that could raise some questions. Tamil Nadu had the highest outstanding liabilities in 2024-25, in absolute terms, among States and UTs, according to RBI. Even as the debt-to-GSDP ratio of Tamil Nadu is close to the FRBM mandate, at 26.07 per cent for FY26, the State has outstanding guarantees given to ailing state public sector undertakings such as TANGEDCO, which increase this ratio. The Budget states that outstanding guarantees towards the end of March 2024 stood at 4.49 per cent of GSDP. RBI’s State finance report pegs the State’s debt-to-GSDP ratio at 30.3 per cent based on budget estimate of FY25.
The State’s estimated real GSDP growth of 9 per cent and nominal growth of 14.5 per cent for FY26, may also be a trifle optimistic given the nominal GDP growth of 10.1 per cent projected for FY26 in the Union Budget, and geo-political uncertainty challenging overall growth. The State’s own tax revenue growth estimates appear on the higher side; as a result fiscal deficit for FY26 could overshoot estimates. A Budget needs to be judged also by the quality of its marksmanship.
