How the KCR government inflicted a debt blow on Telangana
Over the next decade, the state will pay dearly for former chief minister K. Chandrashekar Rao's whims and indiscriminate borrowings
by Amarnath K. Menon · India TodayISSUE DATE: Oct 7, 2024
(NOTE: This is a reprint of a story that was published in the India Today edition date October 7, 2024)
It was his maiden I-Day address, but Chief Minister A. Revanth Reddy had little good news for his people. “Telangana’s debt burden has gone up by 10 times since the state was created in 2014. Total debt was Rs 75,577 crore thenâæit was Rs 7 lakh crore in March,” he said. That said, there was apparently a way out: during his US tour in early August, the World Bank had shown interest in retiring some of the high-cost loans. This, the CM hoped, would lessen the burden imposed on the state by the “indiscriminate borrowings” of the earlier K. Chandrashekar Rao (KCR) regime.
The Congress government has now released a white paper on the state’s finances. “My government will not commit the mistakes of borrowing funds at high interest rates, putting a heavy burden on the people. Despite the financial hurdles, the government is making every effort to fulfil the pre-poll promises of Abhaya Hastham (the slew of guarantees in the Congress manifesto),” Revanth emphasised.
Top of the list was the daunting write-off of farm loans up to Rs 2 lakh, which involves a financial outflow of Rs 31,000 crore. Though the party’s political rivals claim the loan waiver scheme is flawed, the Congress government has made it happen to prove its farmer-friendly credentials.
Fragile finances
When it was carved out of Andhra Pradesh in 2014, Telangana began as a revenue-surplus state. So, what happened in the 10 years that KCR’s Bharat Rashtra Samithi (BRS) ruled the state? An alarming rise in total liabilities, and an unsustainable and mounting debt service burden, as the Comptroller and Auditor General (CAG) observed in its 2022-23 report. ‘Outstanding loans account for 35.6 per cent of the state’s Gross State Domestic Product (GSDP), which is more than the permitted limit of 29.7 per cent of the 15th Finance Commission,’ it said.
“Despite having a good economy, we are facing huge challenges. Telangana has a heavy debt burden, over Rs 6.8 lakh crore as of end of FY24,” Revanth told the 16th Finance Commission (FC) chaired by Arvind Panagriya in Hyderabad on September 10. The state has made a strong pitch for additional assistance or sanction to restructure debt. “If we don’t manage the loans and interest payment, it will slow down progress,” the CM lamented, pointing out how Telangana’s GSDP has a CAGR of 12.9 per cent, outpacing India’s 10.1 per cent. Telangana contributes 5.1 per cent to the national GDP, while its population share averages 2.8 per cent. The state’s per capita income (PCI) is Rs 3.5 lakh against India’s average of Rs 1 lakh.
Telangana’s plight is only slightly better than that of Tamil Nadu, which at nearly Rs 8.3 lakh crore (estimated at March-end, 2024) has the highest amount of outstanding debt among states. Haryana, another outcome of state reorganisation, with which ‘separate state’ campaigners used to compare Telangana before it came into being, estimates that its total debt liability will cross Rs 3 lakh crore by the end of 2024-25.
A not inconsiderable part of Telangana’s debt is the Rs 1.2 lakh crore in off-budget borrowings (OBBs), and a big chunk (Rs 66,854 crore) of that is for the Kaleshwaram Irrigation Project Corporation Ltd (KIPCL). The maximum repayment spread period of OBBs was 14 years and future liability on the Kaleshwaram project towards debt servicing worked out to around Rs 1.4 lakh crore over the next 10 years (see box The White Elephant). ‘This will constitute a huge burden on state finances, constraining them severely and the capacity of the state to have any developmental plans in the near future,’ the CAG report says.
On the power utilities, the report pointed out that they had not divulged details of how some Rs 16,000 crore had been utilised. Documentation regarding risk assessment for guarantees given was also not provided. ‘Even the guarantees which should have been classified as direct 100 per cent liability, were being classified as medium to very low risk,’ the CAG observed.
The CAG report reveals the tardy performance and lack of accountability even in welfare schemes like sheep distribution and rearing and the ‘KCR kits’ for poor expectant mothers. The records for year-wise payments of Rs 1,261.7 crore were unavailable for audit purposes, though the government claimed nearly 1.4 million expectant mothers had benefited from the ‘KCR kit’ direct benefit scheme, which was implemented to improve the numbers in institutional deliveries, Infant Mortality Rate (IMR) and Maternal Mortality Ratio (MMR). The government was to pay Rs 12,000 for boys and Rs 13,000 for girls born to the very poor in deliveries at government healthcare facilities.
In the sheep-rearing scheme, there were serious lapses in maintaining data of the beneficiaries and keeping invoices to support the transport of the animals. The scheme was introduced in 2017 to provide sustainable livelihoods to the traditional shepherd families. At the time itself, livestock industry experts had cautioned that most of the sheep would be on the “biryani lover’s plate” before long. The audit has discovered invoices with fake vehicle registration numbers, those showing transport of more sheep than was possible or permitted, even ‘recycling’ of sheep (the same animals were shown as given to different beneficiaries). The anti-corruption and vigilance inquiries, initiated after the Congress assumed office, have detected suspected fraud of Rs 254 crore so far.
The CAG report also shines the light on another stark reality. The audit found that budgetary grants were made but huge amounts remained unspent in the Dalit Bandhu empowerment scheme, the scheme for building 2 BHK houses for the rural and urban poor and special development fund for welfare activities.
On the positive side, the BRS can justifiably claim to have drawn investments to develop Greater Hyderabad and spur the growth of the urban economy. But even this, analysts contend, is full of murky deals, especially in critical infrastructure such as developing irrigation and power utilities.
A costly mess
KCR’s legacy, then, is a costly mess. The CAG says that in the next 10 years Telangana will have to repay a staggering Rs 2.7 lakh crore as principal and interest on market borrowings alone. This is not including the Rs 19,210 crore principal repayment due for borrowings from other financial institutions. A significant portion of market borrowings was also utilised for providing loans and advances to PSUs, special purpose vehicles (SPVs) and autonomous bodies (ABs) to service OBBs. Overall debt sustainability suggests that the net public debt available to the government would be negative after considering the outgo on the servicing of the OBBs.
Analysts point out that relying on heavy borrowing while ignoring debt management is what has brought the state to this pass. Apart from the profligate infra projects (like in the irrigation and power sectors), other issues include poor targeting of subsidies, lack of transparency, the substantial debt relief granted to farmers, free power that has pushed state utilities into debt traps and interest subsidies on loans. Relying on borrowings to finance these explicit subsidies is not a sustainable strategy because it severely diminishes the resources available for crucial infrastructure development and investment, and now hampers Telangana’s economic growth. Critics say this is the great disservice KCR, the man who claimed that the people of Telangana have been exploited by fellow Telugus of the Andhra region, has done to the people of a state he fought for.
The white elephant
Touted as the world’s largest, the Kaleshwaram Lift Irrigation Scheme (KLIS) was ‘unviable’ from the start, says the CAG audit performance report. It details the massive cost overruns, possible undue benefits accrued to contractors and the poor planning involved. Its cost may top Rs 1.5 lakh crore, as against Rs 81,911 crore quoted by the BRS regime to the Central Water Commission in 2018.
Officials appearing before the judicial inquiries into KLIS, by ex-SC judge P.C. Ghose, and into the power project costs and power purchase agreements, by judge Madan S. Lokur, have indicated that many decisions were arbit and taken at KCR’s behest.
The CAG report says administrative approval was not given for the KLIS project as a whole. Instead, there were 73 separate approvals aggregating to Rs 1.1 lakh crore. Of the total cost of Rs 86, 788.1 crore incurred (as of March 2022), Rs 55,807.9 crore (64.3 per cent) was met through off-budget borrowings (OBBs) raised by an SPV, the Kaleshwaram Irrigation Project Corporation Ltd. The audit suspects undue benefit of at least Rs 2,685 crore went to the contractors for supply and commissioning of pumps, motors, etc. Further, the post-tender inclusion of the price adjustment clause led to an extra payment of Rs 1,342.5 crore. Some of this was rerouted to the BRS via electoral bonds, allege critics. The pink party encashed bonds worth Rs 1,214 crore, SBI documents reveal.
The project’s cost-benefit ratio (CBR) was also inflated; with the latest project cost of Rs 1.5 lakh crore, it works out to 0.52. ‘This means that every rupee spent on the project will yield only 52 paise. It clearly indicates that the project was, ab-initio, economically unviable,’ says the audit report.
The haphazard planning is manifest everywhere. Peak energy demand when all the pumps are operated would be more than the average daily power availed by the state (2021-22). So, even providing power for the lift irrigation will be a challenge. And against a targeted command area of 1.8 million acres, only 40,888 acres has been created till now.