AP, Telangana face budget strain as fiscal deficits cross 3% of GSDP ceiling: Finances report

New Delhi/ Hyderabad: The latest ‘State of State Finances’ report paints a picture of fiscal strain across India, with the southern states of Andhra Pradesh (AP) and Telangana (TG) exhibiting key challenges, including high debt levels and burgeoning committed expenditures.

The 10th edition of the report states that while Central assistance is supporting capital investment, both states, along with many others, are struggling to stay within prescribed fiscal deficit limits. PRS Legislative Research has published a report on the states' financial health as they spend more than what the Central government does.

Debt and deficit pressure on southern states

Both Telugu states are budgeting for fiscal deficits that exceed the limit of 3 per cent of GSDP recommended by the 15th Finance Commission (FC) for the 2025-26 fiscal year.

Andhra Pradesh is estimated to record a high fiscal deficit of 3.8 per cent of GSDP, while Telangana’s deficit is estimated at 3.5 per cent of GSDP. AP’s figure places it among the states with the highest budgeted fiscal deficits for the year.

This high deficit is a major factor driving substantial outstanding debt.

As of March 2025 (Budget Estimates), AP’s outstanding liabilities are estimated at 33 per cent of its GSDP. This figure surpasses the 15th FC’s indicative debt-to-GSDP target of 32 per cent for the state for 2025-26. Telangana, while faring better, is also projected to have liabilities of 27 per cent of GSDP, which is above the 15th FC’s indicative target of 24 per cent.

Committed expenditure constraints

A significant portion of revenue receipts in both states is consumed by committed expenditures, such as salaries, pensions, and interest payments, limiting fiscal space for development.

For the 2025-26 fiscal year, Telangana is estimated to spend 60 per cent of its revenue receipts on these items, marginally higher than Andhra Pradesh’s estimate of 56 per cent.

Central aid from schemes

However, both states are receiving substantial support for infrastructure creation through Central schemes.

The Centre’s Special Assistance to States for Capital Investment (SASCI)—a 50-year interest-free loan scheme—has become a major source of funding. For the 2025-26 period (up to August 11), AP has been allocated Rs 2,010 crore and TG has received Rs 1,770 crore under the scheme.

Furthermore, both states stand to benefit from own-revenue augmentation efforts, particularly in the mining sector. Following a key Supreme Court ruling in July 2024 that upheld state governments’ power to tax mineral rights, revenue from mining is estimated to contribute 0.8 per cent of GSDP in AP and 0.7 per cent of GSDP in TG for 2025-26.

National financial context

The fiscal pressures in the Telugu states mirror national trends.

Collectively, Indian states recorded a revenue deficit of 0.4 per cent of GSDP in 2023-24, indicating that they were borrowing to finance recurring expenses. Highly committed expenditure and subsidies consumed 62 per cent of the aggregate revenue receipts of all states in the same year.

The aggregate outstanding debt of all states reached 27.5 per cent of GDP as of 2024-25, far exceeding the recommended 20 per cent level.

Adding to the strain, the report notes that untied transfers from the Centre have declined during the 15th FC period to 64 per cent of total transfers, reducing states’ autonomy over resource allocation. These national and regional trends underscore the urgent need for enhanced fiscal consolidation and debt management across the country.