Nithin Chandra & Sriram AnanthapadmanabhanTamil Nadu walks into budget day carrying a curious contradiction. It is India’s second-largest state economy, with an estimated ₹35.29 lakh crore GSDP, trailing only Maharashtra and comfortably ahead of Karnataka and Uttar Pradesh.Yet by the govt’s June 2026 white paper, it is also among the country’s most fiscally strained states: a revenue deficit of `78,324 crore, outstanding debt crossing ₹`10.43 lakh crore, the largest of any state, interest payments alone, at about `67,050 crore this year, and projected to climb to `78,677 crore next year.Before anyone panics, a reality check: Tamil Nadu’s debt-to-GSDP ratio, at roughly 30%, sits closer to the middle of the pack among big states. The real worry isn’t borrowing, it’s collection.Revenue receipts have slid from 10% of GSDP in 2021-2022 to 8.32% today. Own tax collection has slipped to just 5.45% of GSDP, a trend the 2021 white paper under the previous administration highlighted.Two govts, one diagnosis — Tamil Nadu is leaving money on the table. How much money? A cautious estimate puts it at more than `1 lakh crore a year, without a single new tax or extra rupee of borrowing sitting inside six specific gaps.The first is GST. Tamil Nadu’s consumers are the richest among their peers, spending `5,701 a month in villages and `8,165 in cities, ahead of Karnataka, Maharashtra and Gujarat. With 77.3 million people, that is one of the largest consumption bases in the country. Yet its GST collection, at 2.04% of GSDP, is the lowest of the four (Maharashtra manages 3.83%). Services generate 53.6% of the state’s economy but only 37.8% of its GST highlighting opportunities to improve formalization and plug compliance gap.Then comes liquor. Alcohol sales brought in `48,344 crore last year, but excise duty, the state’s direct levy, made up only `11,020 crore of that, or about `1,703 per case sold. Most of this growth has come from rising volumes taxed through VAT, rather than from a more differentiated duty on the premium end of the market. Karnataka’s excise yield of about `5,201 per case, on volumes only about 6% higher than TN’s points to room for a more price-tiered excise structure to capture greater value from the same growing market.In the third area, land, stamp duty brings in only 0.72% of GSDP against Maharashtra’s 1.33%, because official land “guideline values” barely move. TN revised them four times between 2002 and 2017, then didn’t for seven years. Real-estate prices don’t wait for the paperwork to catch up. This indicates opportunity to plug leakages occurring on account of registrations happening below actual market value.Mining is another big gap. Tamil Nadu’s revenue in this sector rose from `1,227 crore to `4,433 crore in FY2025-2026, but a drone survey found 160 of 203 quarries (four in five), had dug beyond their permits, with penalties totaling just ₹`68 crore. Statewide drone surveys, tighter reconciliation against e-permits and weighbridge data, and Odisha’s model of pre-cleared blocks ensure faster and transparent allocation of mining permits to convert the reserves to revenues for the state and to prevent under-recoveries through over-exploitation beyond permitted levels.In Central grants, the fifth area, Tamil Nadu’s share of the central tax pool has fallen from 6.64% to 4.097% under the new Finance Commission formula, something the state can’t change. But some losses are addressable. About `2,577 crore of local-body grants were not realized between 2017 and 2020 simply because local elections weren’t held on time, and under the Jal Jeevan Mission, only about 30% of available Central funds were drawn down last year as the previous tranche was not utilized in a timely manner. The June 2026 JJM 2.0 agreement, which unlocked `2,177 crore, shows meeting conditions works with the necessary administrative reforms can unlock grants from the Union govt. While TN can still choose to not participate in the Centre’s schemes that mandate pre-conditions not aligned to its long-held principles such as the conditions around mandatory adoption of National Education Policy, there are multiple avenues, where implementing operational reforms can enable access to a large pool of funding support.Spending discipline is the sixth area that needs addressing. Salaries, pensions and interest account for 61.7% of revenue receipts, against 49.3% in Maharashtra and roughly 44.6% in Karnataka and Gujarat. It leaves little room for anything new. Capital spending has shrunk as a share of the economy, from 1.79% to 1.44%. A CAG audit found 62% of state tenders were awarded with just one or two bidders, showing competition is missing even where the state spends. Improving transparency, strengthening competitive intensity and de-risking projects before tender will enable better value for money.These six areas point to `1 lakh crore of annual fiscal headroom, enough, on paper, to more than resolve the state’s current revenue gap while freeing up fresh room for investment. And Tamil Nadu doesn’t need to choose between growth, welfare and fiscal prudence to get there: sharper collection and confident execution can fund all three at once. With scale, a wealthy consumer base, mineral wealth and rising central support already in its favour, Tamil Nadu has every ingredient it needs to turn this budget into the opening chapter of its next phase of growth.(Nithin Chandra is senior partner, and Sriram Ananthapadmanabhan is partner at global management consulting firm Kearney)
