Tamil Nadu spends too much; Bengal earns too little: A tale of two deficits

Tamil Nadu and West Bengal both ended 2023-24 with revenue deficits, but the similarity conceals different fiscal challenges. The southern state's deficit is expenditure-driven despite a strong revenue base, whereas the eastern state reflects weaker revenues compounded by a heavy debt-servicing burden.

The divergence begins with their economic structures. TN's per-capita GSDP in 2023-24 stood at about ₹3.53 lakh, nearly twice WB's ₹1.81 lakh, which remains below the national average. TN has a diversified industrial base, spanning automobiles, electronics and textiles. WB, with a population density of 1,029 persons per sq km against TN's 555, must finance public services for a far denser, lower-income population.

According to the latest CAG report on State Finances (2023-24), TN's State Own Tax Revenue (SOTR) averaged about 64% of total revenue during 2014-15 to 2023-24, compared with roughly 45% in WB. That 19-percentage-point gap distinguishes a fiscally resilient state from one that relies on transfers, grants and GST compensation. TN's strength lies in fiscal autonomy, WB's vulnerability lies in dependence on transfers.


The composition of own-tax revenue reinforces this contrast.

In 2023-24, SGST accounted for 45% of WB's SOTR but only 37% of TN's. Sales and trade taxes, dominated by petroleum, contributed 36% of TN's SOTR against only 13% in WB's. State excise on liquor accounted for 6% in TN but a striking 20% in WB.

The southern state's revenue base is broad and anchored in commercial activity and consumption. WB's concentrated in two heads it controls only partly: SGST, where rates are jointly decided by the GST Council, and liquor excise, which is politically and socially constrained.

The most striking contrast is the GST dividend.

West Bengal's SOTR grew by about 8.5% annually in both the pre-GST and post-GST periods. TN's growth accelerated from 5.27% before GST to 10% after its introduction. The paradox is clear: the state more dependent on SGST gained little additional buoyancy, while the state less dependent on it captured a substantial dividend.

Higher SGST dependence in WB reflects the absence of alternative revenue sources rather than the strength of its GST base, leaving it exposed to GST-cycle volatility without corresponding upside. TN strengthens its position further through State Non-Tax Revenue (SNTR), which accounts for 10% of total revenue compared with only 2% in WB, reflecting better monetisation of public assets, royalties and user charges.

Committed expenditure - salaries, pensions and interest payments - has risen sharply in both states. TN's increased from ₹67,000 cr in 2014-15 to ₹1.63 lakh cr in 2023-24, absorbing 61% of total revenue. WB's doubled from ₹45,600 cr to ₹89,400 cr and accounts for 45% of revenue, a figure that appears comfortable but is misleading.

The composition reveals the real challenge. Nearly half of WB's committed expenditure is interest payments, compared with one-third in TN. One out of every 2 committed rupees in WB services past debt rather than finances current services - a classic sign of a debt trap. Meanwhile, although both states employ roughly 1.2-1.4 mn personnel, WB's dearness allowance remains below 20%, compared with TN 58%. This is not a saving but a deferred fiscal liability.

The southern state's strengths are its robust own-tax effort, diversified revenue base, strong SNTR and capacity to borrow against future growth. Its vulnerabilities are rapidly rising committed expenditure, dependence on petroleum taxes and the growing fiscal cost of expanding welfare schemes.

The eastern state's strengths lie in a relatively restrained wage bill and a committed-expenditure ratio that appears to leave room for development spending. Its vulnerabilities are a stagnant own-revenue base, concentrated tax structure, negligible non-tax revenue, suppressed DA, and an interest burden that increasingly crowds out productive expenditure.

For TN, two priorities stand out.

Cap committed expenditure at 55% of revenue receipts by 2028-29 through a legislated medium-term fiscal framework incorporating controlled recruitment, outcome-based welfare reviews and pension reforms.

Diversify SOTR beyond petroleum by strengthening property taxation, stamp duties, motor vehicle and electricity duty administration, and GIS- based property mapping.

For West Bengal:

Raise SOTR to 55% of total revenue by 2029-30 through formalisation, tighter SGST compliance, stronger petroleum tax administration and a dedicated State Revenue Intelligence Unit modelled on TN's commercial tax system.

Negotiate debt restructuring with GoI and RBI to replace expensive short-term borrowings with longer-tenor debt while implementing a phased DA normalisation linked to revenue milestones.

Both states face revenue deficits, but the path to fiscal sustainability is different. TN must discipline what it spends, WB must rebuild what it earns.

Banerjee is director, IIM Udaipur, and Shukla is MD-CEO, People Research on India's Consumer Economy (PRICE)