**Table 4. Sensitivity Analysis – Historic Perspective**

|**Assumptions* **|**2003 **|**2004 **|**2005 **|**2006 **|**2007 **|**2008 **|**2009 **|**2010 **|**2011 **|**2012 **|**2013 **|**2014**|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
|Real interest rate||5.5|5.5|5.5|5.5|5.0|5.0|5.0|5.0|5.0|5.0|5.0|
|Real growth rate||4.0|5.0|5.7|5.7|5.7|5.7|5.7|5.7|5.7|5.7|5.7|
|Primary surplus||-0.3|-0.5|-0.1|-1.3|-1.3|-1.3|-1.3|-1.3|-1.3|-1.3|-1.3|
|**Debt dynamics****|||||||||||||
|Debt (% of|||||||||||||
|GSDP)|27.8|28.5|29.1|29.2|30.4|31.5|32.6|33.7|34.8|35.9|37.0|38.0|
||**2015 **|**2016 **|**2017 **|**2018 **|**2019 **|**2020 **|**2021 **|**2022 **|**2023 **|**2024 **|**2025 **|**2026**|
|Real interest rate|5.0|5.0|5.0|5.0|5.0|5.0|5.0|5.0|5.0|5.0|5.0|5.0|
|Real growth rate|5.7|5.7|5.7|5.7|5.7|5.7|5.7|5.7|5.7|5.7|5.7|5.7|
|Primary surplus|-1.3|-1.3|-1.3|-1.3|-1.3|-1.3|-1.3|-1.3|-1.3|-1.3|-1.3|-1.3|
|**Debt dynamics****|||||||||||||
|Debt (% of|||||||||||||
|GSDP)|39.1|40.2|41.2|42.3|43.3|44.3|45.4|46.4|47.4|48.4|49.4|50.4|

*Primary fiscal balance set at its average value for the period 1991-2001. Interest rates set as in Box 1. **Authors’ simulation based on equation (4). Note: The years shown in the table denote fiscal years, e.g., 2003 stands for fiscal year 2003/04.

2026/27 compared to the baseline, but will not threaten fiscal sustainability. The probability of such an event happening is less than 16 percent.<sup>33</sup> An unexpected, adverse combined shock of a more permanent nature (low growth, high real interest rates and large primary deficits over a period of 5 to 10 years) will have grave consequences and eventually require a major fiscal adjustment. If the combined negative shock persists for 10 years debt service as a share of revenue will climb to 31 percent and the debt to GSDP will climb to 65 percent of GSDP by 2015/16. To avoid further increases in debt as a share of GSDP the state government will need to run large surpluses – between 2 and 3 percent of GSDP – in the years to come unless growth improves and real interest rates decline. This is unlikely to be feasible given the constraints to fiscal reform discussed above.

# **_4.3 Capital investment and fiscal space_**

The baseline results suggest that, if the economy evolves as presented in Table 3, Tamil Nadu could reduce debt to GSDP ratio from 27 percent in 2006/07 to 16 percent in 2026/27. This implies that there may be scope for improving the low level of infrastructure investment without derailing the state from its sustainable debt path. Tamil Nadu’s rate of economic growth surpassed the national average GDP growth rates of 5.6 percent in the 1990s. This has placed the state among the best performing states in India. However, its potential economic growth is hindered by infrastructure deficiencies. Although the IT

> 33 Assuming a normal distribution, the probability of a one-standard deviation shock to the real interest rate is 15.9 percent. However, it is very likely that the interest rate shock will trigger negative shocks to the real growth and the primary deficit. If the shocks are perfectly correlated, the probability of the combined shock is 15.9 percent. If they are perfectly uncorrelated, the probability is negligible.

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