Rising Debt, Limited Revenue: How Himachal Is Going Into A Deep Fiscal Hole

Every employee, whether government or private, eagerly waits for salaries in the early days of each month. However, that was not the case for Himachal Pradesh government employees as they faced delays in their salaries due on the scheduled pay date. They argued that the delay is creating financial hurdles, preventing them from meeting their monthly obligations. 

The Himachal Pradesh Secretariat employees wrote a letter to the Chief Secretary and Principal Secretary of Finance, demanding the immediate release of their salaries. Sanjeev Sharma, President of the Himachal Pradesh Secretariat Employees Association told news agency ANI, "This situation is unprecedented. It has never happened before that employees have received their salaries late. We are writing a letter to the Chief Secretary and Principal Secretary of Finance, requesting them to instruct the concerned banks not to impose any penalties for delayed payments on employee loans this time."

Notably, the government employees received their delayed salaries on 5 September after a five-day wait. To defend the delay, Chief Minister Sukhvinder Singh Sukhu termed the move as a measure of "financial prudence and discipline," and noted that releasing salaries early incurs a monthly cost of Rs 3 crore due to a 7.5 per cent interest loan. "We have crossed the stage of the economic crisis and we are working on reforms to ensure financial discipline. We need to make these changes to make Himachal a self-reliant state," CM said while talking to the reporters.

Himachal Pradesh's fiscal health is under scrutiny as the state struggles with economic turmoil led by mounting debt and inadequate revenue sources. In this series, BW Businessworld analyses Himachal Pradesh's fiscal health as the hill state. 

What Exactly Happened?
The hill states' economic turmoil is not a new one as it has been facing high debt issues for many years. However, the heavy monsoon in 2023 impacted its economy, especially agro-sector and tourism. Last year, extreme weather events, including flash floods, cloudbursts, and associated landslides, subsidence, and slope failures, have ravaged the region, causing immense loss of life and property across the state.

A report titled "Preliminary Analysis of 2023 Monsoon Disasters across the state of Himachal Pradesh" stated, "Many hydropower projects and transmission lines were damaged or rendered non-operational. Forest land and vegetation were also gravely affected by landslides. A total economic loss of more than Rs 12,000 crore is being estimated by the state government at the moment."

In Himachal, as per budget provision in 2024-25, fiscal debt was increased to 42.5 per cent from 40 per cent of gross state domestic product (GSDP) in 2022-23. This is much higher compared to the average ratio of all states. "The state government gave a special relief package for the affected families; that includes re-construction aid for damaged houses. For reducing this ratio to a sustainable level, a combined effort is needed by both centre and state," said RP Gupta, Economist, Industrialist and Author.

High Debt And Limited Revenue Sources
Currently, CM Sukhu-led Himachal government is grappling with a significant debt burden and a looming financial crisis, compounded by the potential reinstatement of the Old Pension Scheme (OPS), which comes as the state eagerly awaits a refund of Rs 9,000 crore from the Centre, its contributed amount to the National Pension System (NPS).

Talking about OPS, Narender Bharadwaj, Chair, Himachal Chapter PHD Chamber of Commerce and Industry (PHDCCI) said that the pension system is a critical component of public finance, and managing it effectively is crucial for ensuring both fiscal sustainability and the well-being of retirees.

“The situation with pension schemes in Himachal Pradesh presents a complex challenge, particularly with the financial implications of reinstating the Old Pension Scheme and managing the NPS refund. A thoughtful approach that balances the needs of retirees with fiscal responsibility, explores hybrid pension models and enhances revenue generation will be crucial. Effective communication and strategic planning can help manage the transition smoothly and ensure long-term fiscal health,” Bharadwaj added.

During the decade 2014-2024, combined (states and centre) debt has increased from 67.1 per cent to about 86 per cent of gross domestic product (GDP). From 2004-14, it was reduced from 84.7 per cent of GDP to 67.1 per cent despite the global financial crisis and higher price of imported crude oil.

Experts noted that Himachal's fiscal worries are compounded by soaring staff salaries and pension costs, which together place a heavy burden on the state's finances. According to a media report, dues worth about Rs 10,000 crore are pending for the period 2016-2022. Some reports also stated that the state’s debt had gone up to Rs 76,651 crore in 2023 from Rs 47,906 crore in 2018. 

Apart from high debt, about 59 per cent of the population is agro-dependent earning lower income. There is a need for such a population to be reallocated to industry and service sectors. Besides industry, Himachal should unlock its huge potential of tourism, higher education and super-speciality hospitals. Developing agro-processing industries, cold storage etc., will support the Agro-sector. All such policy tools must be quickly framed and implemented.

"In the next five years, the bank credit and deposit ratio of Himachal must increase from the existing 36.5 per cent to at least 60 per cent as against the national average of about 75-77 per cent. This needs the Centre’s intervention," Gupta added.

Himachal Pradesh's efforts to boost revenue and optimise expenses have yielded mixed results. Measures like imposing a liquor cess, increasing power project royalties, and introducing a water cess aimed to generate additional funds. However, some initiatives have fallen short. For instance, the liquor cess has generated only around Rs 100 crore. The proposed water cess, expected to raise Rs 2,000 crore annually, was struck down by the High Court.

The government has also attempted to rationalise its free power scheme by limiting it to needy people, anticipating annual savings of Rs 200 crore. However, this order remains unimplemented. Additionally, the state's long-standing demand for Rs 4,500 crore in arrears from the Bhakra Beas Management Board (BBMB) remains unresolved, despite a Supreme Court order.

Also, the proposal to increase royalties from central power projects to 18 per cent was rejected by the Centre, citing the Hydro Power Policy of 2008's 12 per cent cap on free power royalties for hydroelectric projects. According to the economist Gupta, both central and state governments must extend production-related fiscal incentives to micro and small industries for goods and services; that will generate middle/high-income jobs and reduce the subsidy burden.

Additionally, matching infra-spending is crucial. However, it requires support from the centre due to limited resources of the state." Also, legitimate dues of States must be quickly released by the Center, especially for weaker states like Himachal Pradesh," Gupta told BW Businessworld. 

While shedding light on how the HP government can diversify its revenue sources, PHDCCI's Bharadwaj added that diversifying revenue sources is essential for any state to ensure fiscal stability and reduce dependency on limited streams. For Himachal Pradesh, given its unique geographic and economic context, there are several strategies to explore.

He told BW that by diversifying its revenue sources and strategically leveraging its unique assets, Himachal can reduce its dependence on limited streams and enhance fiscal stability. The central government’s support through financial assistance, infrastructure development, debt management, and policy coordination can play a crucial role in addressing the state’s fiscal challenges and supporting its economic growth.

“There is debt stress across the nation. In such a situation, the centre also has limitations for extending support to states beyond a certain limit. There is no scope of increasing tax because; during 2014-2024 the combined tax has also increased from 16.4 per cent to about 20.5 per cent of GDP,” he mentioned. He added that considering such a challenging situation, the centre should take policy initiatives for reducing the combined debt/GDP ratio without increasing the tax burden on the general public.

Little Help From Centre?
The hill state’s total expenditure (excluding debt repayment) for the current fiscal is estimated at around Rs 52,965 crore, which is about the same as the revised estimate for 2023-2024, the budget document for 2024-2025 showed. Notably, its revenue for 2024-2025 is projected to be Rs 42,153 crore, with 44 per cent (Rs 18,741 crore) coming from state-generated revenue and 56 per cent (Rs 23,412 crore) from central government funding, indicating a significant reliance on central support.

However, the state has made modest progress in boosting its revenue, with a steady increase in tax revenue from Rs 13,471 crore in 2022-23 to Rs 16,094 crore in 2023-24. Additionally, the state's share of central taxes is expected to rise to Rs 10,124 crore in 2024-25, up from Rs 9,167 crore in 2023-24 and Rs 7,851 crore in 2022-23.

Reportedly, Himachal’s revenue from central grants has been declining, with a notable decrease from Rs 16,734 crore in 2022-2023 to Rs 15,185 crore in 2023-2024, and further down to Rs 13,287 crore for 2024-2025. The state has projected a fiscal deficit of 4.7 per cent of GSDP for 2024-2025, slightly above the 3 per cent target set by the 15th Finance Commission, but an improvement from the previous year's 5.9 per cent deficit.

However, the state's recent fiscal history reveals a concerning trend of exceeding budgeted fiscal deficit targets, with actual deficits of 5.9 per cent in 2023-2024 (versus a target of 4.6 per cent) and 6.4 per cent in 2022-2023 (versus a target of 5 per cent).

In May 2024, Himachal Pradesh Congress leaders hit back at Prime Minister Narendra Modi's accusations that the state government mismanaged central aid for flood victims. CM Sukhu and Congress candidate Vikramaditya Singh demanded that Modi clarify how much funding was actually allocated to the state to address the 2023 disaster. This response came after Modi claimed at a rally that the central government provided substantial funds during last year's monsoon disaster, but the state government mishandled the allocation, terming it "indiscriminate".

In 2017, the Comptroller and Auditor General of India (CAG) warned that HP was on the brink of a debt trap, noting that the state's liabilities had ballooned to nearly Rs 4,200 crore in 2015-2016, with a staggering 62 per cent of the debt due for repayment by 2023.

The government is working on ways to limit the state’s spending. Sukhu stated that the government is reviewing the subsidies being given to the people of the state and informed that he and his cabinet would not take salaries for two months. Meanwhile, experts termed the state’s decision to revive the OPS and Rs 1,500 to women as contributed to the financial problems of the state.