The State's urban growth is hindered by underfunded local bodies and outdated revenue systems, threatening future competitiveness. Despite strong manufacturing and social progress, its cities face deteriorating infrastructure, climate risks, and investment deterrents, unless fiscal reform and empowerment take place
Tamil Nadu's growth story is real with strong manufacturing, solid social indicators, and steady job creation. But its next decade will be decided not in boardrooms or assembly halls, but rather in town halls and ward offices. The state's cities, which generate the bulk of economic activity, are starved of predictable finance. Unless that changes, competitiveness will erode, even if macroeconomic indicators appear respectable.
The State budget is already tight. Nearly two-thirds of its tax revenue is pre-empted by salaries, pensions, and interest, leaving little for new assets, a pattern documented by the Finance Commission. The shift to GST curtailed state-level rate autonomy; Tamil Nadu has repeatedly flagged large cumulative revenue foregone since 2017. The squeeze shows up in capital formation. In 2022-23, capital outlay was about 1.4% of GSDP, versus a national average of 2.1%, according to the Reserve Bank of India's latest comparisons. When capex lags, maintenance is deferred, projects slip, and the service backlog grows faster than budgets.
Urban local bodies bear the brunt. Over half of Tamil Nadu's residents now live in towns and cities, and urban regions account for a disproportionate share of gross state value added. Yet standardised accounts show municipal revenues of roughly Rs 9,000 crore in 2021-22, with barely 53% from own sources and the rest dependent on higher-tier transfers. Property tax, the mainstay everywhere in the world, is still tied to dated rental values, misses swathes of the base, and rarely tracks market appreciation. User charges seldom cover even operating and maintenance costs. Establishment expenditure alone consumes more than half of municipal income in the larger corporations, the RBI's 2024 report notes, leaving little room for drains, buses, sewage, or parks.
The cost of this underfunding is visible and compounding. Dengue seasons follow waste and drainage failures. Chennai's 2015 floods and the 2023 inundations illustrated how stormwater networks built for a gentler climate buckle under cloudbursts. Traffic gridlock in Chennai and Coimbatore burns time and fuel daily; productivity leaks into the air. Industrial clusters such as Tirupur struggle to expand on unreliable urban services. These are not discrete lapses; they are symptoms of balance sheets that cannot support basic urban upkeep, let alone climate adaptation.
A vicious cycle is in motion. Weak services deter investment and shrink the formal footprint; slower growth constrains tax buoyancy; cashless cities defer maintenance again. Two structural headwinds will steepen the curve. An ageing population will add pension and healthcare pressure, even as the urban asset base needs renewal. Climate volatility will force unplanned spending on floods and heat relief while insurance premiums rise and capital becomes more risk-sensitive.
Breaking the cycle demands a shift in fiscal federalism and municipal practice. First, empower urban local bodies to raise and manage their own revenues. Move property tax to a transparent capital-value system with regular revaluation and strong grievance redress. Close mapping gaps with GIS and link billing to updated cadastre; the yield gains pay for the technology within a budget cycle.
Calibrate user charges to cover O&M, with lifeline slabs to protect low-income households. Earmark a predictable share of the state's divisible pool to cities via a formula that rewards service outcomes rather than paperwork.
Second, reduce dependence on ad hoc grants by building a market track for urban investment. Chennai, Coimbatore, and eligible corporations should tap municipal bonds with credit enhancement and escrowed revenues; a state-level pooled finance facility can lower costs for smaller ULBs. Ring-fence water and sanitation revenues for asset upkeep. Publish audited, accrual-based balance sheets and quarterly service dashboards; investors and citizens will reward transparency long before rating upgrades arrive.
Third, manage expenditure with the same discipline as revenue. Shift establishment budgets to performance-linked contracts in core utilities leak detection, pressure management, non-revenue water reduction, and route optimisation, where payback is demonstrable. Bundle O&M into all new capex contracts to avoid stranded plants. Prioritise projects that cut future liabilities: stormwater retrofits that double as recharge, wastewater reuse with guaranteed offtake for industry and power plants, and heat-mitigation through urban greening in the hottest wards.
Fourth, align state targets with city realities. A credible medium-term fiscal plan should make a zero revenue deficit non-negotiable, freeing space for capital grants that co-finance city projects on outcome contracts. Monetise non-strategic land and buildings into a dedicated urban infrastructure fund, with proceeds allocated to projects that raise service coverage or resilience, not to fill revenue gaps. Use digital trails to improve GST compliance in urban supply chains; even small buoyancy gains magnify at the city level.
Finally, govern at the scale of the problem. Water, waste, and floods do not respect municipal borders; basin-level and metro-regional institutions must coordinate upstream abstraction, midstream treatment, and downstream ecology. Standardise indicators and audit protocols already routine in the power sector for water, sanitation, drainage, and buses. Publish city water and carbon balance sheets annually; once numbers are public, course corrections become political assets rather than liabilities.
Tamil Nadu has the administrative depth and industrial base to lead India's next urban transformation. But engines cannot run on empty tanks. If cities continue to rely on sporadic transfers and outdated taxes, growth will plateau, and climate shocks will bite deeper. The choice is stark but tractable: equip municipalities with the tools to fund, operate and adapt, or pay more later for floods, disease and flight of talent and capital. An urban fiscal reset is not a luxury spend; it is the cheapest insurance for the State's competitiveness.