OPINION I The Economic Times

Tamil Nadu and West Bengal both ended 2023–24 as revenue-deficit States, and both have just elected new governments on an anti-incumbency wave. The common label, however, conceals two structurally different fiscal problems. A revenue deficit can arise from a weak revenue base, from rigid and rising expenditure, or from both. Tamil Nadu’s deficit is overwhelmingly an expenditure-side problem resting on a strong own-revenue engine. West Bengal’s deficit is a revenue-side problem compounded by an unusually high debt-servicing burden. Treating them with the same prescription would be a strategic error.

This divergence starts with the economic structure itself. Tamil Nadu’s per-capita GSDP in 2023–24 was about ₹3.53 lakh, nearly twice West Bengal’s ₹1.81 lakh, which sits below the national average. Tamil Nadu carries a diversified industrial base in automobiles, electronics and textiles; West Bengal, with a population density of 1,029 per sq km against Tamil Nadu’s 555, must finance public services for a far denser, lower-income citizenry. This asymmetry should shape, but not excuse, fiscal performance.

Revenue side: autonomy versus dependence

A recent CAG report on State Finances (2023-24) mentions that over the decade 2014–15 to 2023–24, Tamil Nadu’s State Own Tax Revenue (SOTR) has held steady at around 64% of total revenue, against roughly 45% for West Bengal. The 19-percentage-point gap is not a statistical curiosity; it is the difference between a State that can absorb a shock and one that must wait for the Finance Commission, Union grants and GST compensation to act. Tamil Nadu’s strength is fiscal autonomy. West Bengal’s vulnerability is structural dependence on transfers, which leaves it exposed every time devolution formulae are revisited.

The composition of own-tax revenue is even more revealing. In 2023–24, SGST contributed 45% of West Bengal’s SOTR but only 37% of Tamil Nadu’s. Sales and trade taxes, dominated by petroleum, made up 36% of Tamil Nadu’s SOTR but just 13% of West Bengal’s. State excise on liquor was 6% in Tamil Nadu and a striking 20% in West Bengal. Tamil Nadu’s base is therefore broad, anchored in commercial activity and consumption that grows with the economy. West Bengal’s base is concentrated in two heads it controls only partially — SGST, where rates are set jointly in the GST Council, and liquor excise, a politically and socially constrained head.

Most striking is West Bengal’s missed GST dividend. West Bengal’s SOTR grew at roughly 8.5% annually in both the pre-GST and post-GST eras — essentially flat. Tamil Nadu’s, by contrast, jumped from 5.27% pre-GST to 10% post-GST. This is a striking paradox: the State that depends more heavily on SGST drew no incremental buoyancy from GST, while the State that depends less on it captured a clear dividend. The likely explanation lies beneath the tax structure. GST rewards formalisation — organised manufacturing, registered retail, e-invoiced services. Tamil Nadu’s economy supplies that base in depth; West Bengal’s does not. Higher SGST dependence in West Bengal therefore reflects the absence of other own-revenue heads rather than the strength of its GST base and exposes the State to GST-cycle volatility without offering the upside. Tamil Nadu reinforces this advantage with non-tax revenue (SNTR) at 10% of total revenue against West Bengal’s 2% — a five-fold gap reflecting better-monetised public assets, royalties and user charges.

Expenditure side: pressure of a different kind in each State

Committed expenditure — salaries, pensions and interest — has risen sharply in both States. Tamil Nadu’s rose from ₹67,000 crore in 2014–15 to ₹1,62,500 crore in 2023–24 and now absorbs 61% of total revenue. West Bengal’s doubled from ₹45,600 crore to ₹89,400 crore, but at 45% of revenue looks deceptively comfortable. The composition tells the real story.

Nearly 50% of West Bengal’s committed expenditure is interest on borrowings, against 33% in Tamil Nadu. One rupee in two of every committed rupee in West Bengal services past debt rather than delivers current services — a textbook debt trap in formation. Second, although both States employ roughly 1.2–1.4 million staff, dearness allowance in West Bengal is below 20% against Tamil Nadu’s 58%. This is not a saving; it is a deferred liability. Pay-commission catch-ups, court orders or political pressure can convert this gap into a sudden expenditure shock that the State’s weak own-revenue base cannot absorb.

The strength-vulnerability balance sheet

Tamil Nadu — strength: high and stable own-tax effort, diversified base, strong SNTR, capacity to borrow against future growth. Vulnerability: rapidly rising committed expenditure, exposure to petroleum-tax volatility, and the fiscal cost of expanding welfare schemes.

West Bengal — strength: disciplined wage bill and a committed-expenditure ratio that, on the surface, leaves room for development spending. Vulnerability: a stagnant own-revenue engine, narrow and concentrated tax base, negligible non-tax revenue, suppressed DA, and an interest burden that is crowding out everything else.

Two actions for the Chief Minister of Tamil Nadu

Cap and ring-fence committed expenditure at 55% of revenue receipts by 2028–29 through a legislated medium-term fiscal framework: a hiring-and-replacement rule, an outcome-linked welfare review, and a pension-reform roadmap. This protects capital expenditure from being squeezed by salary, pension and welfare growth.

Diversify SOTR away from petroleum dependence by deepening property and stamp-duty reform, professionalising motor-vehicle and electricity-duty administration, and using GIS-based property mapping in urban local bodies. The aim is to lower volatility from oil-cycle swings while preserving the 64% own-revenue ratio.

Two actions for the Chief Minister of West Bengal

Launch a five-year SOTR-to-Revenue programme with a target of 55% by 2029–30, anchored in widening the SGST base through formalisation drives, plugging input-tax-credit leakages, and reviving sales-tax-equivalent collections from petroleum and high-value commerce. A dedicated State Revenue Intelligence Unit, modelled on Tamil Nadu’s commercial-tax wing, should be set up immediately.

Negotiate a debt-restructuring and DA-normalisation compact with the Centre and RBI: convert short-tenor high-cost market borrowings into longer-tenor instruments to ease the interest burden, and pair this with a phased, time-bound DA catch-up tied to revenue milestones. This addresses the State’s two largest hidden risks — the debt trap and the suppressed wage liability — together rather than serially.

Both States face a revenue deficit, but the road out is not the same. Tamil Nadu must discipline what it spends; West Bengal must rebuild what it earns.