Telangana’s fiscal runway: Full throttle, brakes worn thin

Telangana today sits in a fiscally uncomfortable but not yet unmanageable zone. Its numbers in the latest analysis of global analyst firms show a state that has used borrowing actively, expanded capital spending, and benefited from central support, but is now pushing against the limits of prudence faster than many of its peers. Compared to better-run states like Gujarat and Odisha, Telangana looks stretched; compared to fragile states like Punjab, Bihar and Rajasthan, it still has room to course-correct.

Where Telangana stands on deficits and debt

On headline fiscal deficit, Telangana is in the risk zone but not an outlier. Among large states, its FY25 fiscal deficit-to-GSDP is worse than the all-states average but still below the very high levels of Bihar, Andhra Pradesh, Chhattisgarh, Madhya Pradesh, Punjab, Rajasthan and Kerala. These seven states have crossed the 3.5 per cent of GSDP mark against the 15th Finance Commission’s benchmark of 3 per cent plus a conditional 0.5 per cent for power reforms.

Telangana’s bigger concern lies in the speed at which it is consuming its deficit space. By the first nine months of FY26, the state had already exhausted its entire budgeted fiscal deficit for the full year. Andhra Pradesh is in the same position, while Kerala has reached around 84 per cent of its target by the same point. This pattern suggests that Telangana is front-loading its borrowing and spending, leaving little buffer for shocks in the last quarter or for any revenue shortfalls.

On debt, Telangana sits in the middle of the pack. Its debt-to-GSDP ratio in FY25 (RE) is about 27.3 per cent, lower than West Bengal, Bihar, Rajasthan, Kerala and Andhra Pradesh, but higher than Jharkhand, Karnataka, Odisha, Maharashtra and Gujarat. All of these, however, are above the 20 per cent debt-to-GSDP level recommended by the FRBM Review Committee. Telangana is therefore not in the “crisis” category, but neither is it in the comfort zone of Gujarat and Maharashtra, which combine lower debt ratios with stronger fiscal discipline.

Interest burden and revenue quality: early warning signs

Telangana’s interest payments are significant but not yet crippling. Interest outgo is around 15.9 per cent of its revenue receipts in FY25, higher than states like Rajasthan, Karnataka and Gujarat, but still far below Punjab and Kerala, where interest alone consumes more than a quarter of revenue. The fact that Telangana’s interest ratio is above the aggregate state average is a warning that debt is starting to bite into fiscal flexibility.

This is made more complex by a structural shift in state revenues. Across India, aggregate revenue receipts have declined from 13.7 per cent of GSDP in FY22 to 12.2 per cent in FY25, driven largely by a fall in central grants - from around 2.4 per cent of GSDP pre-pandemic to just 1.2 per cent in FY25. Tax revenues have held near 10 per cent of GSDP, but non-tax revenues and grants have weakened. For a relatively young state like Telangana, which initially benefited from buoyant own revenues and generous central support, this tightening external flow is a real constraint.

Like other states, Telangana has had to rely more on its own sources. At the all-India level, the share of states’ own revenue (tax plus non-tax) in total revenue receipts has risen from about 55.3 per cent pre-pandemic to 58.2 per cent in FY25. This sounds positive, but it also means that states’ fiscal capacity is now more vulnerable to local economic cycles, property markets, and administrative efficiency in collections. Telangana’s famously strong early-years tax performance has been dented by slower growth and the fading of the GST compensation regime.

Capex push: strength with a risk tail

A key positive in the analyst reports is the rise in capital outlay across states. Aggregate state capex as a share of total expenditure is estimated at 15.3 per cent in FY25, up from a pre-pandemic average of 13.5 per cent. Telangana’s capital outlay is around 12.4 per cent of total expenditure - lower than leaders like Gujarat, Uttar Pradesh, Odisha and Madhya Pradesh (18–22 per cent), but still ahead of laggards such as Punjab and Kerala.

Crucially, this capex has been supported by the Centre’s 50-year interest-free loans under the Special Assistance to States for Capital Expenditure scheme. Between FY24 and FY26, around 0.4–0.5 per cent of GSDP of states’ fiscal deficits are effectively financed by these loans, allowing states to invest more without proportionately increasing their debt-service burden.

Telangana is a direct beneficiary of this architecture. The combination of regular borrowing and concessional central capex loans has enabled it to maintain a sizeable investment programme even as interest payments remain contained relative to revenue.

However, this comes with two risks:

•First, central support is policy-contingent and time-bound. While allocations under this scheme have been enhanced to Rs 2 trillion for FY27, there is no guarantee of indefinite continuity.

•Second, Telangana’s aggressive front-loading of its fiscal deficit in 9M FY26 suggests that capex and possibly some revenue spending are being pursued at a pace that may not be sustainable if revenues disappoint in the closing quarter.

If growth or collections falter, a state operating with little headroom may be forced into abrupt cuts in capex, exactly the opposite of what is needed for long-term development.

Revenue and expenditure patterns: comparing with peers

The all-India picture shows some encouraging discipline: subsidy spending is around 1.1 per cent of GSDP, down from higher pandemic-era levels, and wages and salaries have remained stable at 3.0–3.2 per cent of GSDP. Social sector spending has risen sharply to about 8 per cent of GSDP in FY25, driven in part by cash transfers and welfare programmes.

Telangana’s profile aligns with a broader group of states where non-developmental spending is not yet excessive, but fiscal pressure is building. The share of non-developmental revenue expenditure in total spending is relatively low in Telangana – about 16.4 per cent in FY25, one of the lowest among large states and well below Kerala, Punjab, Tamil Nadu and Haryana. This is a genuine strength: more of Telangana’s budget is, on paper, going into developmental and capital heads than into pure housekeeping.

However, the analyst reports’ narrative also flags areas where Telangana is closely associated with states showing fiscal slippage. Along with Andhra Pradesh and Kerala, Telangana is singled out as having already exhausted its full-year fiscal deficit in the first nine months of FY26. This places it in a cohort of states where the trajectory is deteriorating even if the level of debt or interest burden has not yet reached emergency levels.

By contrast, Odisha and Gujarat are presented as examples of balanced management: manageable debt and deficits, low interest payments, and high capital outlay. Punjab is the cautionary tale, with very high debt, deficits and interest-to-revenue ratios, and a large share of non-developmental expenditure that crowds out capex. Telangana today is somewhere in the middle: not structurally broken like Punjab, but drifting away from the prudent path of Odisha and Gujarat.

The 16th Finance Commission and Telangana’s medium-term outlook

The 16th Finance Commission’s recommendations for FY27–31 will also shape Telangana’s future fiscal space. The overall states’ share in the divisible tax pool is retained at 41 per cent, but the devolution formula has shifted: income distance, area and demographic performance have been de-weighted, while population (2011) and a new criterion - contribution to GDP - have gained weight.

In this new framework, Telangana’s share in the Centre’s tax devolution declines modestly compared to the 15th Finance Commission period. The state joins Uttar Pradesh, Madhya Pradesh, West Bengal, Odisha and others in losing some share, while states like Karnataka, Kerala, Gujarat and Haryana gain. For Telangana, which is already grappling with slowing central grants and a greater reliance on its own revenues, this downward tweak in devolution is another tightening screw.

The Commission has also recommended that off-budget borrowings be discontinued and brought within the formal definition of debt and fiscal deficit. For Telangana, this is both an opportunity and a threat. It will improve transparency and prevent hidden liabilities from compounding future stress, but it will also restrict the ability to park commitments in special-purpose vehicles and public enterprises outside the main budget.

A critical but balanced verdict

For policymakers in Hyderabad, the message is sobering but actionable. Telangana does not face an immediate solvency crisis, but it is burning through its fiscal space faster than is wise in a context of rising market scrutiny and widening spreads on state development loans. A deliberate move towards tighter control over the pace of deficit creation, better sequencing of capex, and deeper attention to strengthening own-tax and non-tax revenues will be essential if the state is to avoid sliding into the high-stress cluster over the next Finance Commission cycle.

(The author is with Cholleti BlackRobe Chambers, Hyderabad)