Telangana faces fiscal strain amid uncertainty over Union Budget allocations

Uncertainty over Union Budget allocations has pushed Telangana into a fiscal squeeze. With no firm Central support for major projects, the State may rely on higher borrowings, asset monetisation and tax revisions to sustain welfare and infrastructure commitments

Hyderabad: Uncertainty over the Central allocations in the Union Budget 2026-27 has placed Telangana in a tight fiscal corner, as the State government is trying to recalibrate its numbers. Without assured grants or shared funding, the State risks drifting towards a borrowing-led model to keep development and welfare promises on track.

With no firm commitments for big-ticket projects such as the Regional Ring Road, Metro Phase II and Musi River rejuvenation from the Union government, the Congress government here is facing a widening resource gap. To keep welfare promises and infrastructure plans afloat, the government might be pushed towards a mix of difficult and unpopular options, including increased borrowings and a hike in taxation.

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The Finance department is exploring various options to keep the State Budget plans afloat, in tune with the Congress government’s priorities. The most immediate route is higher market borrowing. But with the fiscal deficit cap fixed at 3 per cent of GSDP, additional loans would sharply raise the State’s debt stock and long-term interest burden. There is also the possibility of off-budget borrowings through State entities to provide temporary fiscal room.

Telangana has already used financial engineering, including swapping high-interest loans, to create temporary borrowing space during the current financial year.

Under the Congress rule, the total debt is inching closer to Rs 3 lakh crore, including around Rs 83,000 crore through market borrowings during the current fiscal alone. As a result, rising debt servicing costs would steadily squeeze funds meant for social welfare and development works in future budgets. Thus, such a stop-gap borrowing strategy to plug a funding gap may, over time, narrow the State’s ability to invest in fresh development or respond to economic shocks.

Another option is expenditure compression, where welfare schemes may be staggered, scaled down or delayed. Capital-intensive urban and irrigation projects could be slowed, reducing revenue expenditure flexibility in subsequent budgets, which could eventually affect both growth momentum and employment generation.

Officials were asked to examine asset monetisation by accelerating the sale or long-term leasing of valuable land parcels and public assets to raise non-tax revenue. While this offers quick liquidity, it reduces future asset buffers and is not a sustainable recurring source.

Tax and user charge revisions present another lever. Higher property taxes, increased fees for civic services and revisions in excise or transport levies could be considered. However, such proposals would have political implications and may add to inflationary pressure on households.

“We are exploring all possibilities to keep the State economy on track. The budget plans will be finalised only after the department-wise consultations, followed by a meeting with the Chief Minister, are completed,” a senior official in the Finance department said.

Notwithstanding these measures, the State’s fiscal trajectory appears to be tilting from growth-driven expansion to a fiscal management phase. Unless either Central support improves, tax revenue increases or the State government reprioritises expenditure, Telangana could soon witness a sharp decline in its spending on welfare and development.