High debt, low capex push AP finances into risk zone

Andhra Pradesh’s state finances are flashing red lights on multiple dashboards. The latest analyst reports place it firmly in the high-risk cohort, with elevated debt, deficits, and interest burdens that mirror those of the most stressed large states. While not yet at Punjab’s crisis levels, Andhra’s trajectory - marked by full exhaustion of its FY26 fiscal deficit in just nine months - signals a state that has prioritised spending over sustainability, leaving little room for error.

Deficits and debt: deep in the danger zone

Andhra Pradesh is among the seven large states with FY25 fiscal deficits exceeding 3.5 per cent of GSDP, joining Bihar, Chhattisgarh, Madhya Pradesh, Punjab, Rajasthan, and Kerala, against the 15th Finance Commission’s 3 per cent benchmark (plus 0.5 per cent conditional). Aggregate state deficits hit 3.3 per cent in FY25 (PA), up from sub-3 per cent discipline in prior years.

The FY26 story is even grimmer. Like Telangana, Andhra exhausted its entire budgeted fiscal deficit in 9M FY26, while the national average used just 45.9 per cent. This overrun leaves Amaravati with no fiscal headroom for the year’s remainder, amid slowing national tax growth (10.2 per cent YoY) and GST moderation (5.9 per cent).

Debt-to-GSDP at 35.5 per cent in FY25 (RE) ranks Andhra sixth worst among large states, behind only Punjab (46.9 per cent), West Bengal (40 per cent), Bihar (38 per cent), Rajasthan (37 per cent) and Kerala (36.2 per cent). All exceed the FRBM’s 20 per cent ideal, and Andhra’s high debt pairs with high deficits, amplifying vulnerability - unlike Bihar, where high debt is offset by low interest costs via central devolution.

Interest payments: a growing chokehold

Interest claims 18.6 per cent of Andhra’s revenue receipts in FY25, above the 12.2 per cent national average and states like Telangana (15.9 per cent) or Gujarat (12 per cent), but below Punjab, Haryana, Kerala, and West Bengal (over 20 per cent). Analyst reports flag Andhra explicitly among states where high debt compounds fiscal stress through elevated interest.

National context offers slim comfort:aggregate interest-to-receipts moderated post-COVID thanks to central capex loans, but Andhra’s position underscores reliance on such support. With state development loan (SDL) spreads widening to 70 bps over G-secs amid fiscal worries and high borrowings (Rs12.5 trillion nationally in FY26), Andhra faces costlier future refinancing.

Revenue pressures: grants down, own sources strained

Aggregate state revenues dipped to 12.2 per cent of GSDP in FY25 from 13.7 per cent in FY22, hit by central grants falling to 1.2 per cent from 2.4 per cent pre-pandemic. Own revenues rose to 58.2 per cent of receipts, but Andhra - like peers - grapple with GST compensation’s end and national GST growth slowing sharply.

In 9MFY26, national tax revenue grew 10.2 per cent (vs. 12.6 per cent prior), and non-tax revenue 11.2 per cent, but Andhra’s high-deficit path implies revenue shortfalls or spending overruns.

Expenditure: populist tilt crowds out capex

Andhra’s non-developmental revenue expenditure (interest, pensions) hits25.7 per cent of total spending in FY25 (RE) - above the 24.8 per cent large-state average, alongside Punjab, Tamil Nadu, Haryana, West Bengal, and Uttar Pradesh, and far from Telangana or Odisha’s lower shares. Kerala leads at 42.2 per cent.

Capex at 8.8 per cent of total expenditure lags national 15.3 per cent and leaders like Gujarat (22.4 per cent), Uttar Pradesh, and Odisha (21.9 per cent & 20.9 per cent). Central interest-free loans (0.4–0.5 per cent GSDP) propped up aggregate capex, but Andhra’s low share signals populist revenue spending crowding out investment. Analyst reports note Andhra (7th-worst fiscal rank, score 43.8) with Telangana and Kerala for slippage, contrasting Odisha/Gujarat’s balanced profiles.

16th Finance Commission: small devolution gain, big mandates

Andhra gains modestly in tax devolution share (+0.17 per cent, to 4.2 per cent) under new criteria emphasising 2011 population and GSDP contribution over income distance. It outperforms Uttar Pradesh or Telangana but lags Karnataka/Gujarat.However, the Commission demands 3 per cent fiscal deficits, bans off-budget borrowings (folding them into metrics), and pushes DISCOM privatisation, subsidy rationalisation, and SPSE closures - challenges for Andhra’s high-debt model.

Balanced critique: risks outweigh positives

Positives:Leveraged central capex loans for some investment; modest devolution gain; interest moderated nationally.

Risks:FY25 deficit >3.5 per cent; 9M FY26 full exhaustion; 35.5 per cent debt; 25.7 per cent non-developmental spend; SDL cost pressures.

Urgent path ahead

Amravati must hit the brakes:slash remaining FY26 spending; rationalise non-developmental outgo; prioritise own-revenue growth (land, stamps up nationally); prepare for off-budget scrutiny. Without discipline, rising SDL costs and Commission mandates risk a Punjab-style spiral. Central loans bought time; self-reliance is now imperative.

Additional Insights on Andhra Pradesh’s finances

While the analyst report provides a solid aggregate snapshot, recent developments and deeper dives reveal more layers to Andhra Pradesh’s fiscal challenges. Here’s a balanced expansion on strengths, risks, and comparative position, drawing from the reports and supplementary context.

Untapped Strengths

Modest devolution gain under 16th FC:Andhra secures a small increase in central tax devolution share (+0.17 per cent to 4.2 per cent), outperforming losers like Uttar Pradesh or Telangana. This could provide ~Rs10,000–15,000 crore extra annually if growth holds, aiding revenue stabilisation.

Revenue surplus potential in own taxes:Historical trends show Andhra’s own tax revenue buoyancy in stamps/registration and excise (national growth 12.5 per cent and 11.2 per cent in 9M FY26). If scaled, this offsets GST slowdowns better than grant-dependent peers.

Central capex leverage: Like others, Andhra taps 50-year interest-free loans (national Rs2 trillion for FY27), funding ~10 per cent of capex without immediate debt hit. FY26 budget’s Rs3.22 lakh crore outlay (1/3 borrowed) prioritises education/welfare, potentially boosting human capital for growth.

Bifurcation-adjusted resilience:Per capita GSDP trails Telangana slightly, but Andhra’s larger nominal GSDP offers scale for industrial revival if fiscal space frees up.

Verdict: Andhra’s risks dominate - off-budget black hole, repayment cliffs, populist drag - pushing it toward Punjab/Kerala territory. Telangana, despite shared FY26 overrun, shows superior own-revenue discipline. Urgent reforms (revenue mobilisation, SPSE cleanup) are essential before 16th FC deadlines hit.

(The writer is with Cholleti BlackRobe Chambers, Hyderabad)