Congress govt’s debt restructuring push raises questions over fiscal strategy

The Telangana government has revived efforts to restructure around Rs 25,000 crore in loans to reduce interest costs. While officials expect major savings, financial experts warned that the move could increase long-term debt liabilities and encourage additional borrowings without structural fiscal reforms

Hyderabad: The Congress government has renewed its efforts to restructure around Rs 25,000 crore in loans. While the move is being projected as a step towards easing the State’s debt burden, it has raised concerns over its long-term impact on public finances, with critics arguing that it offers only temporary relief while deepening structural fiscal risks.

The Finance Department is seeking to reduce interest rates on select high-cost loans from nearly 11 per cent to about 7 per cent through loan restructuring. Officials claimed that a similar exercise last year led to annual savings of around Rs 5,000 crore. The officials said that the second phase of loan restructuring could also save another Rs 5,000 crore.

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In fact, the Centre had rejected a similar restructuring proposal last year, raising concerns over Telangana’s rising debt levels and borrowing limits under the Fiscal Responsibility and Budget Management (FRBM) framework. The proposal was returned on technical grounds linked to excessive borrowing, forcing the State to withdraw its plan.

However, the Congress government is once again preparing a detailed proposal, with senior officials, including those in Delhi, working to secure approval. While the intent is to reduce immediate financial pressure, officials admitted that this might result in compounding liabilities in the absence of structural fiscal correction.

Financial experts pointed out that restructuring had lowered interest outgo in the short term, yet it does not reduce the principal liability. Instead, it extends repayment timelines and increases the overall debt burden over time. They pointed out that the savings generated through lower interest payments were not being channelled into productive asset creation.

Instead, there are indications that the government is using this fiscal space to accommodate fresh borrowings, effectively maintaining a cycle of debt, which is contrary to the stated goal of stabilising State finances.

“During the last fiscal, the government claimed that it had saved Rs 5,000 crore through loan restructuring. But the fact is that by restructuring loans, the government improved room for obtaining more loans under Fiscal Responsibility and Budget Management (FRBM) rules,” a financial expert said.

He recalled that the borrowing limit was pegged at Rs 54,009 crore for 2025-26, but the Centre allowed Telangana to raise up to Rs 71,400 crore following loan restructuring. However, the State borrowed a massive Rs 82,150 crore by the end of the financial year.