by Santosh Chaitanya Keshaboina, Research Analyst at the Foundation for Democratic Reforms

At its formation in 2014, Telangana inherited a strong fiscal base. The Fourteenth Finance Commission projected it to have the highest revenue surplus among all states, totaling ₹1,18,678 crores¹ over five years. The state began with a revenue surplus and a moderate debt-to-GSDP ratio of 19%. The economic outlook was strong, buoyed by Hyderabad, a thriving metropolis that once catered to the entire undivided Andhra Pradesh but post-bifurcation became the economic engine of a smaller Telangana. This gave Telangana a unique advantage: a compact state centered around a high-revenue urban hub.

A decade later, in 2025, Telangana’s initial fiscal surplus has eroded due to excessive spending on short-term welfare schemes and poorly planned capital projects with little return on investment. With limited focus on fiscal sustainability, the debt-to-GSDP ratio has surged to 42% in 2023–24, raising serious concerns about the state’s long-term fiscal health. 

Telangana’s Medium-Term Fiscal Policy Statement² for 2025 set the debt-to-GSDP target at 33.1% for FY 2023–24. Reported debt stood at ₹4,03,664 crores (27.57% of GSDP), excluding guarantees and off-budget borrowings. However, under Section 2(l) of the Telangana FRBM Act, 2005, total liabilities must include such obligations. When accounted for, the actual debt-to-GSDP ratio rises to 42%, breaching the fiscal target. 

The developments of the past decade offer important lessons in public finance management. 

Misallocation of Borrowed Resources 

Telangana’s problem lies not in borrowing itself, but in how the borrowed funds are utilised. Much of the borrowed funds go toward recurring expenses and short-term welfare, while capital projects often lack viability due to poor planning and insufficient cost-benefit analysis. The utilisation of borrowed funds for recurring day-to-day expenses defies the ‘Golden Rule’³ of public finance. This combination of short-term welfare spending and poorly planned capital investments is placing significant strain on the state’s finances and constraining its capacity to support future development. It has weakened the state’s fiscal stability and limits development potential.  

Welfare Imperatives vs Fiscal Discipline

Social welfare spending is vital in a developing economy for reducing poverty, inequality, and capability deficits. However, such entitlements must be calibrated to match available revenue to maintain fiscal sustainability. When Individual Short-term Welfare (ISW) expenditures crowd out developmental capital investments, it creates a fiscal trap forcing the state to borrow more just to maintain current operations, thereby limiting future growth potential. This challenge is evident in Telangana, where, despite clear signs of fiscal stress, new welfare schemes were introduced ahead of elections, compounding already high committed liabilities. It underscores a deeper governance challenge, where short-term political incentives often take precedence over long-term fiscal responsibility, a pattern that cuts across parties and administrations, pointing to a systemic weakness in subnational fiscal management.

The Need for a Non-Partisan Fiscal Council in a Federal Democracy

Telangana is not an exception; West Bengal, Andhra Pradesh, and Punjab have also breached the Fiscal Responsibility and Budget Management (FRBM) limits⁴. In India’s multi-party federal system, political divergence between the Union and state governments is common, often leading to allegations of bias particularly in fiscal matters, when different parties are in power at each level. States frequently accuse the Union of partisan treatment in the allocation of resources or approvals, especially when electoral incentives and populist measures dominate decision-making. In such a context, ensuring fiscal discipline cannot depend solely on political will or moral appeals.

Recognising this institutional gap, the Thirteenth Finance Commission recommended the establishment of an independent Fiscal Council to monitor compliance with fiscal responsibility laws (FRBM), assess fiscal stress, and evaluate the long-term sustainability of public debt. Successive Finance Commissions have echoed this call, especially in light of concerns about perceived partisan oversight by the Union government.

To safeguard transparency, enhance accountability, and promote cooperative federalism, India must urgently institutionalise a non-partisan Fiscal Council. This body should function with credibility and independence, akin to international counterparts such as the Congressional Budget Office (CBO) in the United States, the Office for Budget Responsibility (OBR) in the United Kingdom, and the Parliamentary Budget Office (PBO) in Australia⁵. These institutions serve as fiscal watchdogs, providing independent analysis to legislatures and the public alike, thereby strengthening democratic accountability and enabling sound public finance.

Way Forward

Telangana’s fiscal trajectory, once robust, now shows rising debt and shrinking fiscal space, posing risks to growth, financial stability, and public confidence.While the Chief Minister’s acknowledgment of this fiscal stress is a positive development, meaningful reforms are essential to avoid a low growth-high debt trap that could undermine the state’s creditworthiness and borrowing capacity. Some suggestions worthy of mention include: 

• Prioritising growth-enabling investments over short-term welfare schemes
• Enforce the Golden Rule i.e., maintain a zero revenue deficit
• Institutionalise cost-benefit analysis for all capital projects
• Enhancing transparency through regular publication of fiscal indicators.

Welfare and growth rest on a foundation of sound public finance. Telangana must act now to avoid long-term fiscal distress.

Footnotes

1. Based on data from Table 11.2 (Post-Devolution Revenue Deficit/Surplus) in the Fourteenth Finance Commission Report, aggregated for the period 2015–16 to 2019–20. ↩︎
2. Medium Term Fiscal Policy Statement ↩︎
3. The golden rule, as recommended by the 13th Finance Commission, asserts that borrowing must be reserved for investment purposes only and the government is not to utilise national savings to finance consumption (paras 9.18, 9.19, 9.70,  Thirteenth  Finance Commission Volume 1) ↩︎
4. A Plea for Inclusive and Sustainable Growth,Foundation for Democratic Reforms, “Figure 1A”, Page number 19 ↩︎
5. A Plea for Inclusive and Sustainable Growth,Foundation for Democratic Reforms, Section 1.5.6: “Independent Monitoring and Analysis of Fiscal Situation.” ↩︎