Experts say the state's economy is grappling with hidden debt, rising welfare costs, and lack of transparency.
Recent data from the Comptroller and Auditor General of India has validated concerns expressed by Telangana Chief Minister Revanth Reddy that his state is facing a monthly revenue shortfall of ₹4,000 crore. This, Reddy had said, was pushing the state towards 'bankruptcy'.
According to CAG data, the state reported a revenue deficit -- the gap between current expenditure and receipts -- of around ₹4,023 crore in the first month of the current financial year.
The state government has projected a revenue surplus of 0.2 per cent in the Budget Estimates (BE) for 2025-2026.
The state's fiscal deficit is pegged at 3 per cent, which would contribute to debt-gross state domestic product (GSDP) ratio of 28.10 per cent at the end of FY26.
While the projections are not very alarming and one may argue that a deficit in the first month could be due to initial cash management, the CM's statement and the CAG reports highlighted the seriousness of the situation.
Although Telangana projects its debt-to-GSDP ratio will worsen to 32.5 per cent at the end of the next financial year, experts say this figure fails to capture the full picture.
That's because it excludes off-budget borrowings (OBBs) -- debt that is not reflected in the government's official Budget and fiscal calculations.
More debt than shown
Over the years, the state borrowed more to fund 'big-ticket items' such as the Kaleshwaram Lift Irrigation Scheme, besides those relating to housing, drinking water supply, roads, and metro rail.
Much of the loans for these projects and schemes were raised not directly by the state government but by special purpose vehicles (SPVs) and corporations.
These loans eventually come to the government but are not shown in the Budget math.
E Revathi, director of the Centre for Economic and Social Studies , pointed out that nearly 85 per cent of these off-budget borrowings are linked to irrigation and drinking water projects, with the Kaleshwaram Corporation alone accounting for over half of the total as of FY24.
The interest rates on these loans are higher -- between 8.9 per cent and 10.5 per cent -- compared to the average market rate of around 7.6 per cent, Revathi said.
This was explained in Telangana's 2023 White Paper on State Finances, which said lenders charge a premium as these state-backed entities do not have a significant revenue source of their own.
According to the White Paper, Telangana's outstanding debt rose to 26.6 per cent at the end of FY24 from 14.4 per cent of GSDP as of FY15. However, if government-guaranteed loans raised by SPVs and serviced by the government are included, the debt-to-GSDP ratio would increase to 36.9 per cent as of FY24.
The state's debt servicing burden -- the amount required to pay interest and principal on existing loans -- as a share of total revenue receipts increased to 34 per cent as of FY24 from 4 per cent at the end of FY15, leaving limited fiscal space for essential expenditure.
"The implications due to lack of transparency for any state can be severe. It is essentially a governance issue and restricts the borrowing space of the governments," said Revathi.
The result, Revathi said, is the government now carries more financial risk without these loans showing up clearly in budget documents.
Borrowing rules relaxed
Part of the reason for this surge in borrowing is the Telangana Fiscal Responsibility and Budget Management (Amendment) Act, 2020, which raised the limit on annual incremental risk-weighted guarantees from 90 per cent to 200 per cent of the previous year's total revenue receipts.
Other states, such as Kerala and Punjab, cap their guarantees at 80 per cent of the previous year's total revenue receipts.
Despite having relatively strong own-tax revenues, Telangana is heavily reliant on the Reserve Bank of India's emergency cash tools -- Ways and Means Advances (WMA) and overdrafts -- to manage its finances.
An economist, on the condition of anonymity, said while Telangana's tax collections through goods and services tax and other state taxes are relatively strong, the government still faces serious pressure because of the borrowings it has already taken over the years and committed to repay.
Where did the money go?
The economist said several large infrastructure projects were on hold during the final years of undivided Andhra Pradesh, and their costs were revised in the post-bifurcation period, adding to the capital burden. The state is further burdened after taking over the discoms losses.
Besides, successive governments in the state introduced many welfare schemes that hit its exchequer.
The Bharat Rashtra Samithi government implemented major schemes like Rythu Bandhu (financial assistance to farmers), Dalit Bandhu (financial capital assistance to scheduled caste families), Aasara pensions (old age and widow pension), and housing, which kept subsidies in the range of 6 to 10 per cent of revenue expenditure between FY20 and FY24.
The Congress government has renamed and expanded these schemes, while introducing new ones such as Rythu Bharosa (rebranded farmer support), Cheyutha pensions, Indiramma houses for the homeless and landless, and the Maha Lakshmi scheme (free bus travel for women and subsidised LPG).
These measures are expected to raise subsidy spending to a record 11.5 per cent of revenue expenditure in FY25 (BE).
Like other states, Telangana cannot cut its committed expenditure -- salaries, pensions, and interest payments -- which constituted 35 to 45 per cent of revenue expenditure over the past five years.
As a result, when the Budget tightens, sectors such as education and health care suffer.
Though the state is not facing immediate default, there is very little room left for further borrowings without long-term consequences.
Experts say that Telangana must adopt innovative strategies to boost its own tax revenues, enhance transparency, and better manage both committed and discretionary spending to restore fiscal stability.
Feature Presentation: Rajesh Alva/Rediff
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