Himachal Pradesh: Hill Economics, Heavy Liabilities
Image credit X.com @SukhuSukhvinder
Himachal’s finances won’t “collapse,” but they will stay breathless unless the state flattens its committed-spending glacier.
By P SESH KUMAR
NEW DELHI, September 28, 2025 —Himachal Pradesh’s budget looks like a mountain road: narrow, winding, prone to landslides. The state carries one of the heaviest liability loads in India (≈42–44% of GSDP) even as committed spending (salaries, pensions, interest) eats up well over two-thirds of revenue.
The CAG’s ledgers show back-to-back revenue deficits and persistent fiscal gaps; the latest budget still prints a revenue deficit of 2.8% (RE 2024–25) easing to 2.5% (BE 2025–26) and a fiscal deficit aiming at 4%.
Meanwhile, AJNIFM’s PFPI 2023–24 ranks Himachal 8th of 10 Special Category States overall, worst on debt management, and flags it as high-risk on “profligacy”-a polite way of saying “overspending pressure” is real. In short: a hill state with structural constraints, living with a big debt mountain and very little fiscal shoulder.
The structural backdrop: “Special Category” in a post-Plan world
As a Special Category State, Himachal historically depended on generous central transfers and revenue-deficit grants to offset high service costs over difficult terrain and a narrow tax base. That model hasn’t disappeared; it’s just changed its clothes. The 15th Finance Commission kept Post-Devolution Revenue-Deficit (RD) grants flowing to deficit states—Himachal included—and PRS notes HP was slated to receive RD grants throughout 2021–26 (₹9,377 crore in 2022–23 alone).
Even with this crutch, Himachal still showed a revenue deficit after grants in 2022–23-evidence that structural pressures now exceed the classic cushion.
In 2025, the Chief Minister Sukhwinder Singh Sukhu went to the 16th Finance Commission asking to continue RD grants (minimum ₹10,000 crore a year) and to recognize hill-state eco-services and hazard risks (cloudbursts, avalanches, GLOFs) in the formula. Translation: the state’s own buoyancy won’t close the gap soon; it needs sustained, calibrated federal support.
The audited anchor: what the CAG ledger actually says
FY 2022–23 (CAG, Accounts at a Glance).
Himachal closed the year with a revenue deficit of ₹6,336 crore and a fiscal deficit of ₹12,380 crore. Cash-flow stress showed up in RBI ways-and-means usage and even brief overdrafts-symptoms of a treasury constantly tight on liquidity.
FY 2023–24 (CAG, Accounts at a Glance).
The story repeats: revenue deficit ₹5,559 crore; fiscal deficit ₹11,266 crore. A large slice of new debt simply services old debt-CAG and press briefings point out that over half of borrowing went to repay existing loans. Debt ratios climbed into the ~44% of GSDP zip code-above target-and the CAG flags 72%+ of revenue spend as committed (salaries, pensions, interest), which suffocates flexibility.
This is the core pathology: a heavy, sticky revenue bill and debt service that eats future room, forcing capital-expenditure squeeze and keeping the development engine short of fuel.
The “now”: budgets that defend the gap rather than close it
The 2025–26 Budget doesn’t pretend to magic away the hole. PRS pegs revenue deficit at 2.8% of GSDP (RE 2024–25), easing to 2.5% in 2025–26 (₹6,390 crore); fiscal deficit is shaved to 4.0% after a much higher 6.6% RE print in 2024–25.
Receipts (ex-borrowing) actually decline 3% from RE to BE, and expenditure drops 11%-belt-tightening to avoid a blowout. Crucially, only ~7% of net expenditure is capital outlay in 2025–26, with ~72% of revenue spending going to salaries, pensions, interest. You don’t build a lot of highways with that mix; you just keep the payroll and the bondholders happy.
PRS also notes the liability overhang: outstanding liabilities ≈42.5% of GSDP at end-2024–25, barely improved from the prior year. The state is trying revenue tweaks-the water cess on hydropower, a milk cess, and higher taxes/duties on electricity—but these are pebbles against a boulder.
Himachal through AJNIFM’s new PFPI lens (2023–24)
The AJNIFM Public Financial Performance Index (2023–24) is the freshest composite look at state PFM, built on 10 years of audited Finance Accounts and 23 parameters across resource, expenditure, deficit, debt, contingent liabilities, and “profligacy” (overspending). Two takeaways are sobering for Himachal:
Himachal ranks 8th out of 10 Special Category States on the composite PFPI—toward the bottom of its peer set.
It is graded worst among Special Category States on “Debt Management”, and tagged high-risk on the “Profligacy Index” (along with Sikkim, Mizoram), signalling elevated vulnerability if populist outlays persist without offsetting reform.
In other words, an independent national benchmark says exactly what the CAG tables whisper: debt is the Achilles’ heel, and overspending pressures are real.
Why the hill math refuses to balance
Committed outgo is a fiscal glacier.
Himachal’s public payroll, pensions, and interest together swallow around three-quarters of revenue. With an aging workforce and a still-rising debt stock, interest + pensions are on an upward glide even when salaries are contained. This is the “glacier” that moves slowly but remorselessly.
Debt that pays for yesterday
CAG’s lens-and local reportage-show a majority of fresh borrowing goes to refinance old debt. That’s rolling the snowball, not building roads. When over half of new debt is a refinance, capex becomes the adjustment valve, not the priority.
Narrow, volatile revenue base.
Industrial tax handles are limited; services and tourism are seasonal; hydropower royalties fluctuate with hydrology and tariffs. The government has reached for new cesses (power-water, milk) and projects own-tax-to-GSDP ~6.6% in 2024–25, but the base is too thin to outrun committed growth without deeper reform.
Liability ratio already at the red line.
Outstanding liabilities ≈42–44% of GSDP keep Himachal near the top of India’s debt league. With fiscal deficits still ≥4% and revenue deficits still ≥2.5%, debt dynamics can worsen if growth or transfers wobble. The AJNIFM “Debt Management” worst-in-class tag simply quantifies this structural fragility.
The federal lifeline is necessary-but not sufficient.
Even with RD-grants and enhanced devolution, Himachal posted revenue deficits in 2022–23 and 2023–24. The ask to the 16th FC for a ₹10,000 crore minimum annual RD grant and a hill-state green/disaster fund underscores how dependent fiscal balance is on Union support.
Does the CAG’s 2025 publication (up to 2022–23) still help?
It captures the direction, but misses the heat. The all-India State Finances volume shows Himachal slipping into revenue deficit and high debt by 2022–23. The state-specific CAG 2023–24 then confirms the stress persisted (RD ₹5,559 crore; FD ₹11,266 crore), with overdraft episodes and refinance-heavy borrowing. The 2025–26 budget continues to pencil in sizable revenue gaps and a 4% fiscal-deficit target. If you stop at 2022–23, you miss how sticky the deficits have become and how little fiscal room exists today.
Verdict
Himachal is not in free fall-it’s in a tight bind. The hill-state cost structure and a narrow tax base create a permanent revenue headwind. The budget keeps the lights on by rolling debt and squeezing capex, while hoping incremental cesses and central support bridge the gap. AJNIFM’s PFPI adds empirical bite: weak debt management, overspending risk, and an overall rank near the bottom among Special Category peers. Without a strategy to flatten committed growth and lift own-revenue quality, the state will keep trading tomorrow’s investment for today’s payroll.
Way forward — a hill-state playbook that’s actually doable
Target the glacier: Commitment control is step one. Freeze new fiscally open-ended schemes; push NPS-style parametric reforms on pensions where legally/contractually feasible; cap annual salary-pension-interest growth to a combined ceiling. Publish a rolling Committed Expenditure Roadmap every budget.
Make debt boring again.
Adopt a Debt Management Statement with a 7-year redemption map; swap into longer tenors opportunistically; build a sinking fund glide path; stop back-to-back short-tenor refi that crowds out capex. Aim to reduce the share of new borrowing used for debt repayment below 40% within two years. The PFPI debt-management “worst” tag should be treated like a red flag on the dashboard.
Hedge the revenue base.
Scale compliance tech for SGST (e-invoice ↔ e-waybill triangulation), digitize stamp-duty valuation, and rationalize user charges where services are delivered (tourism, parking, solid waste, urban amenities). Keep hydro-water cess predictable to avoid investor flight; channel the proceeds into green capex to buttress the 16th FC “eco-services” argument.
Protect a capex floor—and O&M.
Legislate a capex-first cash rule (say, minimum 10–12% of net expenditure) and ring-fence O&M in health/education so assets don’t decay. If RE slippages emerge mid-year, adjust transfers/subsidies first, not capital. Current budgets allot barely ~7% to capex—too low for a catch-up state.
Make the federal case with data.
Bundle a Hill State Fiscal Compact for the 16th FC with quantified eco-services, hazard costs, and climate-resilience needs. Pair that with transparent quarterly fiscal dashboards (receipts, committed ratio, debt service, capex execution) to prove reform credibility.
Fast facts
RD & FD (CAG): FY 2022–23 RD ₹6,336 cr, FD ₹12,380 cr; FY 2023–24 RD ₹5,559 cr, FD ₹11,266 cr.
Overhang: Outstanding liabilities ≈ 42.5–44% of GSDP (2024–25), among India’s highest.
Committed spend: ≈ 72% of revenue expenditure (salaries, pensions, interest) in 2025–26 BE; capex ≈ 7% of net spend.
AJNIFM PFPI 2023–24: Himachal 8/10 among Special Category States overall; worst on Debt Management; high-risk on Profligacy.
RD grants: HP receives Post-Devolution RD grants across 2021–26 (₹9,377 cr in 2022–23) yet still runs revenue deficits-proof the gap is structural.
Bottom line: Himachal’s finances won’t “collapse,” but they will stay breathless unless the state flattens its committed-spending glacier, professionalizes debt management, and widens its own-revenue pipes-all while making a smarter, data-rich case for federal support tailored to hill-state realities.
(This is an opinion piece, and views expressed are those of the author only)
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