Telangana’s Fiscal Crisis and Reddy’s Risky Gamble
Telangana, India’s youngest state, has long been touted as a model of progress and development. However, beneath the surface of glossy infrastructure projects and ambitious welfare schemes lies a fiscal reality that is far less promising.
Under Chief Minister Revanth Reddy’s stewardship, Telangana’s finances have worsened, although he inherited a significant debt burden from the previous BRS government led by K. Chandrasekhar Rao. The outstanding debt, estimated at around ₹5 lakh crore, carries a hefty servicing cost running into several crores each month. Despite this financial strain, Reddy’s administration continues to pursue extravagant initiatives, creating a growing mismatch between spending and revenue generation capacity.
Telangana’s debt burden has ballooned in recent years, with the state’s fiscal deficit exceeding the limits prescribed by the Fiscal Responsibility and Budget Management (FRBM) Act. As of 2023, Telangana’s outstanding debt stands at over Rs 5 lakh crore, a staggering increase from just Rs 1.4 lakh crore in 2014 when the state was carved out of Andhra Pradesh. Much of this debt is attributed to extravagant spending on projects that yield little immediate return.
Reddy’s administration has doubled down on populist schemes, such as massive farm loan waivers and free electricity for farmers, while also announcing grandiose infrastructure projects. While these initiatives are politically popular, they have placed an unsustainable strain on state finances. The state’s tax revenue, primarily from GST and excise duties, has not kept pace with the spiralling expenditure.
A significant chunk of Telangana’s budget is now allocated to welfare schemes. Flagship programs like the Dalit Bandhu scheme, offering substantial cash transfers to Dalit families, and KCR Kits for new mothers have earned praise but are economically burdensome. These schemes consume a disproportionate share of the state’s resources, leaving little room for essential sectors like education and healthcare.
In my view, Chief Minister Revanth Reddy’s penchant for populist announcements seems to have little regard for fiscal prudence. For instance, the proposal to provide free housing to all Below Poverty Line (BPL) families, while laudable in principle, lacks clarity on funding sources. The state has also embarked on several infrastructure projects, such as multi-level flyovers and irrigation projects, with little cost-benefit analysis.
One of the most significant financial drains is the state’s power sector. Telangana’s commitment to providing free electricity to farmers, while politically expedient, has pushed power distribution companies (discoms) to the brink of bankruptcy. The discoms’ cumulative losses now exceed Rs 40,000 crore. Despite repeated warnings from economists and financial experts, the government has shown no inclination to reform the sector.
Moreover, delayed payments from the state to power generators have exacerbated the crisis. The mounting dues have forced generators to reduce power supply, leading to frequent outages and dissatisfaction among citizens.
One of the fundamental flaws in Telangana’s fiscal management is its overestimation of revenue. The state’s budgets consistently project unrealistic growth in tax revenues, leading to shortfalls and higher-than-anticipated borrowing. For example, the 2023-24 budget projected a 20% increase in tax revenue, a figure that analysts called overly optimistic given the post-pandemic economic recovery.
The government has also relied heavily on off-budget borrowings, further obscuring the true extent of the state’s liabilities. Loans taken by public sector undertakings (PSUs), guaranteed by the state, do not reflect in official debt figures, but they pose a significant risk to fiscal stability.
Chief Minister Reddy’s defenders argue that his initiatives are aimed at creating a welfare state and reducing inequality. However, critics point out that without fiscal sustainability, these programs will eventually collapse under their weight. Telangana’s development model, which initially focused on industrial growth and IT sector expansion, now seems skewed toward welfare handouts and political appeasement.
The state’s economic fundamentals remain strong, but they are increasingly undermined by short-sighted policies. The lack of investment in revenue-generating sectors, coupled with unchecked spending, could lead to a fiscal crisis.
For Telangana to avoid a financial meltdown, a course correction is essential. The state needs to prioritize revenue-enhancing reforms, streamline welfare schemes to target only the most vulnerable, and cut down on wasteful expenditure. Fiscal discipline must be restored, and the focus should shift back to long-term economic growth rather than short-term political gains.
Having said that, Chief Minister Revanth Reddy faces a crucial choice: continue on the path of populism, risking financial ruin, or adopt a more balanced approach that ensures both welfare and fiscal sustainability. Time will tell whether he chooses prudence or persists with profligacy, but the current trajectory remains undeniably precarious.
