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Days after C Joseph Vijay was sworn in as Tamil Nadu’s Chief Minister on May 10, a flagship election promise of his Tamilaga Vettri Kazhagam (TVK) party is under scrutiny. Farmers are furious, claiming that the government’s crop loan waiver falls short of what Vijay had promised. He had pledged to completely drop cooperative crop loans for farmers owning less than five acres of land and to provide a 50 per cent waiver for larger farmers.

 

However, the new government’s announcement was limited, igniting debate about the costs of TVK’s welfare agenda. The controversy has brought attention to a question facing the government: Can it finance the TVK’s welfare promises, which are estimated to cost Rs 1 trillion?

 

Tamil Nadu has considerable economic strength and revenue-generating capacity. Its per capita income increased from 165 per cent of India’s per capita income in FY21 to 176 per cent in FY25. Prosperity allows Tamil Nadu to fund welfare programmes and absorb additional expenditure commitments.   

Tamil Nadu is rich but does it have fiscal room? The state’s finances improved noticeably over five years under the Dravida Munnetra Kazhagam government, which lost the assembly elections to TVK. The revenue deficit declined from 3.28 per cent of gross state domestic product (GSDP) in FY21 to 1.47 per cent in FY25, while the fiscal deficit narrowed from 4.6 per cent to 3.24 per cent. Outstanding liabilities fell from 31.8 per cent of GSDP to 26.65 per cent during the period.   

  Tamil Nadu’s finances are healthier compared to the pandemic years, but the fiscal deficit is slightly above the 3 per cent ceiling prescribed under the state’s fiscal responsibility framework. The room for major spending expansion is not unlimited. While outstanding liabilities remain below the 30-33 per cent range that the 15th Finance Commission considers broadly sustainable for states, implementing large welfare commitments could slow down or even reverse fiscal indicators. Loan waivers, subsidies and transfers will place additional pressure on expenditure and could widen both the revenue and fiscal deficits if not accompanied by higher revenues or spending cuts elsewhere.   

Tamil Nadu’s strong social outcomes partly explain why welfare spending has remained a political priority across governments. The share of people facing multidimensional poverty in the state has fallen from 36.5 per cent in 2005-06 to just 2.2 per cent in 2019-21, among the lowest levels in India. The decline reflects substantial improvements in living standards and access to basic services over the past two decades.   

 

For the Vijay government, the challenge is therefore not one of addressing widespread deprivation, but of determining how much additional welfare spending can be undertaken without compromising fiscal sustainability.

 

Taken together, the data suggest that Tamil Nadu’s finances are healthier than they were five years ago and its social indicators are among the best in the country. Whether TVK can fully deliver on its ambitious promises may depend less on the strength of the economy it inherited and more on its ability to balance welfare with fiscal discipline.