Bengal has finally turned saffron, a new political star has arisen in Tamil Nadu to herald the possible end of the era of Dravidian politics, and the Communists have been erased from the political map of India. These are the key takeaways from the recent round of assembly elections in India. Prime Minister Narendra Modi remains firmly entrenched at the top of our political spectrum, his popularity as high as ever, though major parts of the South still remain a distant dream for him. Home minister Amit Shah, who led the party’s gritty strategy making and campaign in Bengal to dethrone Mamata Banerjee, remains his undisputable No. 2.
However, while the Bharatiya Janata Party is euphoric about its recent electoral performance in Bengal and Assam, the Congress is crowing about its comeback in Keralam and the TVK led by Tamil actor Joseph Vijay is basking in adulation, officials manning the department of expenditure in the Union finance ministry are a worried lot. So are the mandarins of the RBI, the NITI Aayog and the Finance Commission. These bodies track borrowing, debt levels, revenue generation and expenditure quality of states. They have a tangible reason to fret about. The recent assembly polls saw a cascade of welfare promises that carry a hidden R1.69 lakh crore fiscal burden for state budgets already straining at the seams.
The election pledges of 2026 in states like Tamil Nadu and Bengal were threatening to push fiscal deficits well above the 3 per cent target
That is the main reason, economists say, Modi warned of the tough economic times ahead, asking people to use public transport or shared car pools, shift to electric vehicles, cut down on vacations abroad and reduce gold purchases – all just a day after taking the victory lap in Kolkata. The exhortation to voluntary belt-tightening came in the wake of reports of a hike in fuel prices, even as oil-marketing companies are bleeding. The government took so long to act because of the elections in five states, particularly Bengal and Assam, where the BJP had high stakes.
Populist electoral promises, focusing on freebies and cash hand-outs, are increasingly straining Indian state budgets, and this round of assembly polls was no exception. Economists and researchers express concern that this trend creates a ‘populist trap’, where sustainable developmental projects are sacrificed for short-term political gains. The election pledges of 2026 in states like Tamil Nadu and Bengal were threatening to push fiscal deficits well above the 3 per cent target. These promises, including higher welfare cash transfers and free utilities, risk reducing funds for critical infrastructure development.
Pushing up deficits
State elections are increasingly becoming key fiscal turning points for Indian states, with welfare-led promises now playing a central role in shaping spending patterns and pushing up overall deficits. A growing body of evidence suggests that these election-linked commitments are not only raising expenditure in the short term but also leaving a lasting imprint on state finances.
According to an Emkay Global Financial Services research report, state fiscal deficits have risen by about one percentage point during election years since 2023. More importantly, the increase has shown little sign of reversing once elections are over, indicating a structural shift rather than a cyclical spike.
The election pledges of 2026 in states like Tamil Nadu and Bengal were threatening to push fiscal deficits well above the 3 per cent target
The report highlights that revenue expenditure tends to rise ahead of elections and continues to stay elevated afterwards, reflecting the permanent nature of welfare commitments. In contrast, capital expenditure has remained largely flat, suggesting that new spending priorities are not translating into higher investment.
The scale of pre-election promises in several large states further adds to the fiscal strain. Tamil Nadu’s commitments ahead of elections are estimated to add about 2.2 per cent of GDP in additional spending, while Bengal could see an impact as high as 3.4 per cent of GDP. These estimates come at a time when state finances are already under pressure from existing deficit levels and rising expenditure commitments.
Current fiscal positions across states underline the stress. Bengal’s fiscal deficit has remained above 3 per cent for several years, while Tamil Nadu is at about 3.5 per cent, Keralam at roughly 3.4 per cent and Assam close to 4 per cent in its latest reported figures. On an aggregate basis, state deficits are tracking at about 3.4 per cent of GDP, above the budgeted estimate of 3.1 per cent, indicating a persistent overshoot.
At the same time, borrowing conditions have tightened. State development loan spreads have widened to nearly double their long-term average, reflecting higher perceived risk and rising financing costs. This combination of elevated deficits and higher borrowing costs is reinforcing fiscal pressures across states.
Taken together, the trends suggest that the long-assumed 3 per cent fiscal deficit threshold is no longer acting as a ceiling for states. Instead, it is increasingly becoming a baseline level. The broader implication is that election cycles are embedding higher spending commitments into state budgets, crowding out capital expenditure and contributing to a structurally higher fiscal deficit path, with knock-on effects for borrowing costs and the wider macro-economic environment.
Freebies and handouts burden
The freebies and handouts promised this time include free gold coins to brides and six free LPG cylinders per year (by Vijay’s TVK in Tamil Nadu), higher pensions and interest-free loans to young entrepreneurs (by the United Democratic Front (UDF) led by the Congress in Keralam) and implementation of the Seventh Pay Commission and financial aid to unemployed youth (by the BJP in West Bengal).
According to estimates, the proposed schemes mentioned in Vijay’s election manifesto could push annual welfare spending to about Rs1 lakh crore
While anti-incumbency played a major role in the BJP’s win in Bengal, the party also laid out lavish spending promises – most notably doubling the cash transfer scheme to women to Rs3,000 per month. This could cost up to 3.4 per cent of GDP incrementally. The promises in the other states (Keralam and Assam) are relatively less fiscally burdensome but can be equally damaging.
Tamil Nadu, on the other hand, is one of the most industrialised states in the country, while Keralam has a sizeable population abroad and is a key source of inward remittances to India. Industrial policies to be taken up by the new government in Bengal are being closely watched, which could also help lift its economy.
In Tamil Nadu, manufacturing, as a percentage of GDP, is at 25 per cent, much higher than the pan-India average of 15-16 per cent. The state historically has relied on welfare politics, and it remains unclear how the new chief minister will approach this agenda.
Actor-turned-politician Vijay’s economic agenda has only a brief mention in TVK’s election manifesto, and it is to be seen how he firms this up. Tamil Nadu’s economy has been growing at a much faster pace than the national average – with a real growth of 10.83 per cent in 2025-26 after 11.19 per cent in 2024-25. Its GSDP at current prices had reached Rs31.19 lakh crore in 2024-25.
In his first speech after taking the oath of office, Vijay launched a scathing attack on his predecessor, M.K. Stalin and the DMK-led government, claiming that the latter had left behind a massive debt burden of Rs10 lakh crore and emptied the state treasury. While addressing the gathering after taking the oath, the chief minister said that the financial condition of the state was far worse than revealed and hinted at releasing a White Paper on Tamil Nadu’s finances for greater transparency. The remarks triggered a sharp response from former Chief Minister Stalin, who rejected the allegation that the state coffers were empty. “Don’t start saying right away that the government has no money,” Stalin said in a post on X. “It does have it. What’s needed is the will to give it to the people and the ability to govern.”
Governments that borrow recklessly to pay for unproductive schemes actively weaken economic growth
The exchange mirrors a similar situation from 2021, when then Finance Minister P. Thiaga Rajan released a White Paper soon after the DMK came to power, describing Tamil Nadu’s finances as ‘dire’ after a decade of AIADMK rule. Now, five years later, Vijay is preparing a similar exercise – this time blaming the outgoing DMK administration for leaving the state ‘in bad shape’.
Can TN sustain higher debt?
According to data released by the RBI, Tamil Nadu’s outstanding liabilities stood at Rs9.56 lakh crore at the end of 2024-25 – the highest among Indian states. At the same time, Tamil Nadu is the fastest-growing state in the country, posting a real growth rate of 10.8 per cent in 2025-26, up from 11.2 per cent in 2024-25, as per the old GDP series with 2011-12 as the base year. Thus, Tamil Nadu remains one of India’s fastest-growing states.
Faster-growing economies can generally sustain higher debt because of stronger repayment capacity. The state’s debt-to-GSDP ratio stood at 30.6 per cent in 2024-25, lower than the pandemic peak of over 32 per cent in 2024-22, reveals RBI data.
Even the DMK government’s own 2021 White Paper had admitted that Tamil Nadu’s financial condition was weak and that the state had borrowed more money than any other state in India. This means that the R10 lakh crore debt mentioned by Vijay is not only because of the last DMK government. The debt has been increasing over many years under different governments. A recent report by the Finance Commission also showed that Tamil Nadu’s debt kept rising steadily over the years and jumped sharply during the Covid-19 period.
A major concern, however, is Tamil Nadu’s high committed expenditure – spending on salaries, pensions and interest payments. According to PRS Legislative Research, nearly 62 per cent of the state’s revenue receipts in 2025-26 were budgeted to go towards these mandatory expenses, leaving less room for development spending. In this situation, Vijay’s promise of giving 200 units of free electricity every two months becomes important because it will increase government spending.
By the year-end, Keralam and Tamil Nadu are expected to enter a so-called ‘ageing category’, when more than 15 per cent of a state’s population is above the age of 60. This is likely to increase expenditure on pensions, healthcare and social welfare in the coming years
In 2025-26, Tamil Nadu had already planned to spend more than R72,000 crore on subsidies and welfare schemes. This was even higher than the amount set aside for development projects like roads and infrastructure. According to estimates, the proposed schemes mentioned in Vijay’s election manifesto could push annual welfare spending to about Rs1 lakh crore.
Tamil Nadu also faces long-term fiscal challenges because of its ageing population. The RBI, in its study of states’ 2025-26 budgets, had noted in January 2026 that, by the year-end, Keralam and Tamil Nadu are expected to enter a so-called ‘ageing category’, when more than 15 per cent of a state’s population is above the age of 60. This is likely to increase expenditure on pensions, healthcare and social welfare in the coming years.
As for Bengal, the state is seen to have grown by 7.6 per cent in 2025-26, while Keralam is budgeted to grow at 12 per cent during 2025-26, with a GSDP of Rs14.27 lakh crore. Significantly, a PRS report pointed out that, in August 2024, the state government of Keralam had issued an order to assess the expenditure on schemes included in the state’s five-year plan. If the schemes are found to be non-essential, plan expenditure would be reduced by 50 per cent. This was due to the state’s high debt burden. In 2024-25, its fiscal deficit had spiked to 3.9 per cent of the GSDP.
However, all is not lost. With a focus on industrialisation, capex rejuvenation, inflation management, and focus on reforms, the BJP’s win in Bengal could mark the beginning of a capex spending cycle in the state, a template it followed in other states, where it came to power recently – Uttar Pradesh, Odisha and Assam. In that case, there could also be an uptick in industrial activity in Bengal.
The winners need to realise that debt-ridden government finances and slow economic growth are two sides of the same coin. Governments that borrow recklessly to pay for unproductive schemes actively weaken economic growth. The growth rate in per capita GDP – far slower than the growth rates of overall GDP – as well as uncomfortable levels of unemployment, are a reflection of the stresses building up in the system. These mandates should be seen as an opportunity to correct the course.