TN budget: Fiscal deficit estimated to reduce to 3.04% of GSDP in 2025-26
Challenges persist for Tamil Nadu due to the reduction in central transfers, which continue to weigh heavily on the state’s fiscal position
In his budget speech for FY 2025-26, Tamil Nadu finance minister Thangam Thennarasu outlined key fiscal targets aimed at propelling the state towards its goal of a $1 trillion economy by 2030.
Own Tax Revenue projections
According to the budget documents, Tamil Nadu is projecting a 14.6 per cent increase in the state’s Own Tax Revenue for 2025-26, estimating it to be ₹2,20,895 crore.
This is a significant recovery from the ₹1,92,752 crore in the 2024-25 Revised Estimates, driven by improved tax collection efficiencies and economic activity.
The state expects total revenue receipts to grow by 12.8 per cent, reaching ₹2,49,713 crore, with tax revenues constituting 75.31 per cent of this total. Non-tax revenue is projected to go up slightly to ₹28,819 crore, up from ₹28,124 crore in 2024-25, contributing to the state’s overall revenue growth.
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Disproportionate share in central taxes
However, challenges persist due to the reduction in central transfers, which continue to weigh heavily on the state’s fiscal position.
A key issue in Thennarasu's speech was over the state's disproportionate share of central taxes. Despite Tamil Nadu contributing 9 per cent to India’s GDP and 6 per cent of its population, its share of central taxes remains disproportionately low.
The finance minister termed the state’s 4 per cent share in central taxes as a "gross injustice" and expressed frustration over the central government's financial policies.
For 2024-25, grants-in-aid from the Union government are expected to fall to ₹20,538 crore, down from ₹23,354 crore.
Impact of shortfall
However, the state anticipates a modest improvement in 2025-26, with grants-in-aid projected at ₹23,834 crore. Central taxes, pegged at ₹ 52,491 crore in the Revised Estimates for 2024-25, still fall short of expectations.
Thennarasu explained the impact of this reduction, noting that central transfers have dropped from 3.41 per cent of the state's GSDP in 2016-17 to an expected 1.96 per cent in 2024-25, leading to a cumulative loss of ₹45,182 crore. This shortfall is expected to account for nearly 44.43 per cent of the state’s projected fiscal deficit.
Tamil Nadu government has focused on controlling non-development expenditure, with Total Revenue Expenditure projected at ₹3,73,204 crore in 2025-26, which is a 9.65 per cent increase, the budget documents also showed.
The state is prioritising capital expenditure, with an allocation of ₹57,231 crore for 2025-26, a 22.38 per cent rise from the previous year.
The total capital outlay, including net loans, is expected to reach ₹65,328 crore.
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Fiscal deficit in check
Despite the challenges faced by the Tamil Nadu government, the state government aims to keep its fiscal deficit in check, aiming to bring it down to 3.04 per cent of GSDP in 2025-26, continuing its path of fiscal consolidation.
The state is also focusing on reducing its revenue deficit, which is expected to decrease from ₹46,467 crore in the 2024-25 revised estimates to ₹41,635 crore in 2025-26.
The government plans to bring the revenue deficit down to 1.17 per cent of GSDP, close to the levels seen in 2015-16.
