In the latest edition of Talking Sense With Srini, The Federal’s Editor-in-Chief, S Srinivasan, and A Kalaiyarasan, Economist and Professor at the Madras Institute of Development Studies, dissected Tamil Nadu’s economic trajectory. Their analysis comes in the wake of the state’s Finance Minister Thangam Thennarasu presenting the budget for FY25-26, which is also the last full-fledged budget before next year’s assembly election.
‘Gap between ambition and feasibility’
Tamil Nadu has set an ambitious goal of achieving a $1 trillion economy by 2030, a target that has raised both optimism and scepticism. Kalaiyarasan noted that while such economic aspirations are politically-attractive, they are often detached from ground realities.
“At the current pace, Tamil Nadu may take about 15 years to reach this milestone,” he said, underscoring the gap between ambition and feasibility.
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“With a Gross State Domestic Product (GSDP) of $310 billion, the state would need to triple its economy within just five years. This would require an extraordinary growth rate of 26 per cent, whereas the current trajectory remains at around 8 per cent,” he added.
The challenge, therefore, is not just achieving higher growth but ensuring that such expansion is sustainable and inclusive.
Manufacturing strength vs employment challenges
Tamil Nadu has long been recognised as a manufacturing hub, balancing high-end industries such as automobiles and electronics with a strong base of labour-intensive Micro, Small, and Medium Enterprises (MSMEs). However, as automation increases, the manufacturing sector is generating fewer jobs, raising concerns about employment absorption.
While Tamil Nadu boasts a high Gross Enrollment Ratio (GER) of 47 per cent, many graduates struggle to find suitable employment, leading to an increase in gig work.
“The challenge is to align educational output with the skills actually required by the workforce,” Kalaiyarasan explained.
Srinivasan pointed out that Tamil Nadu has one of the highest workforce participation rates for women in India, yet the state faces a crucial test in ensuring that growth in manufacturing translates into employment opportunities.
“The state has successfully attracted major global investors such as Apple and Foxconn, but the real test lies in how well it integrates MSMEs into these supply chains to create more jobs,” he said.
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Agriculture’s declining role
Agriculture’s contribution to Tamil Nadu’s economy has been steadily shrinking, currently accounting for just 6-10 per cent of the Gross State Value Added (GSVA). Despite this, the state continues to present a separate agriculture budget, prompting questions about its relevance.
Srinivasan argued that agriculture, though economically smaller, carries significant cultural and political weight.
“Agriculture remains deeply embedded in Tamil Nadu’s identity. The state’s biggest festival, Pongal, is an agrarian celebration, and many people, despite urban migration, maintain strong ties to their rural roots,” he said.
However, Kalaiyarasan highlighted climate change as a major disruptor, with frequent floods leading to declining yields. He stressed the importance of investing in climate-resilient seeds and post-harvest infrastructure to mitigate these risks.
“As agricultural income falls, we must ensure alternative job opportunities in manufacturing and services so that people can transition out of farming without economic distress,” he noted.
This makes Tamil Nadu’s industrial and employment policies even more critical to ensuring a smooth economic shift.
Importance of English proficiency
The ongoing debate over the National Education Policy (NEP) and the three-language formula remains contentious in Tamil Nadu, with the state opposing the imposition of Hindi. While this debate is largely political, Kalaiyarasan noted that Tamil Nadu has economically benefitted from its strong emphasis on English, particularly in IT and global business sectors.
“Knowing multiple languages can certainly be an advantage, but the real economic driver for Tamil Nadu has been English proficiency, which has positioned the state well for international markets,” he said.
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Srinivasan added that while language policies often become political flashpoints, the bigger issue is Tamil Nadu’s economic positioning within India’s federal structure.
TN’s decreasing share of central funds
Beyond growth targets, Tamil Nadu has voiced concerns over its decreasing share of central funds. Former Finance Minister Palanivel Thiagarajan recently pointed out that while Tamil Nadu contributes significantly more in taxes, it receives far less in grants compared to states like Uttar Pradesh.
Srinivasan noted that pending dues to Tamil Nadu amount to ₹45,000 crore, which is equivalent to 44 per cent of the state’s fiscal deficit.
“The state argues that it is being short-changed in central transfers, which has significant implications for its development plans,” he said.
Moreover, Tamil Nadu’s per capita income is twice the national average, yet central allocations remain skewed in favour of states with higher populations but lower economic output. This fiscal imbalance remains a major point of contention between the state and the Centre.
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