India: Technical Assistance Report—State of Tamil Nadu—Modernizing Budget Formulation and Managing Fiscal Risks

IMF Staff Country Reports, June 26, 2020

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Although Tamil Nadu’s public financial management has been characterized by strong fiscal discipline to date, risks and challenges are emerging.
The State has largely observed the Fiscal Responsibility Act targets on debts and deficit (25 percent and 3 percent to GSDP, respectively) except during the electricity bailout in 2016–17.
These targets appear to have been met by:
- controlling and delaying expenditure,
- underallocating mandated payments to various reserve funds, and
- allowing off-budget borrowing by Public Sector Undertakings (PSUs).
As a result, the State’s borrowing capacity is restricted, leaving limited fiscal space to address high priority needs in education, health, electricity, roads, and water sectors, as well as to address growing infrastructure pressures.
More than 63 percent of the State’s spending on current items is committed to salaries, pensions, and interest payments.
Little room remains for additional borrowing to fund spending pressures; moreover, climate change is likely to exacerbate fiscal risks from water stress and natural disasters.

Fiscal targets and exceptions:
- Fiscal Responsibility Act targets: debts = 25 percent to GSDP; deficit = 3 percent to GSDP.
- Exception noted during the electricity bailout in 2016–17.
Methods used to meet targets:
- Controlling and delaying expenditure.
- Underallocating mandated payments to various reserve funds.
- Allowing off-budget borrowing by Public Sector Undertakings (PSUs).
Fiscal space and constraints:
- Borrowing capacity is restricted, limiting capacity to finance priorities in education, health, electricity, roads, and water.
- More than 63 percent of current spending committed to salaries, pensions, and interest payments, reducing flexibility.
Emerging and future risks:
- Climate change likely to exacerbate fiscal risks through water stress and natural disasters.
- Growing infrastructure pressures increase demand for financing in a context of limited borrowing capacity.