The ongoing financial crisis in the northern state of Himachal Pradesh that has led to the state government delaying salaries of employees and rethinking its plans of giving out doles and freebies has been in the making for some time. To some extent, the state has also been shouldering a high bill on salaries, pensions, and subsidies and its debt burden has been rising.
Analysts had flagged concerns at the time when Himachal Pradesh Chief Minister Sukhvinder Singh Sukhu had presented the state Budget 2024-25 in February this year and had noted that its fiscal ratios could be higher than estimated.
For 2024-25, the state has targeted a fiscal deficit of 4.7% of GSDP (Rs 10,784 crore). However, in 2023-24, its fiscal deficit as per the revised estimate was pegged at 5.9% of the GSDP versus 4.6% in the Budget estimate. In FY24, the state’s revenue deficit was also higher at 2.6% of the GSDP in the revised estimate as against 2.2% in the Budget estimate. For FY25, the state has pegged the revenue deficit at 2% of the GSDP.
India Ratings and Research had at the time said it expected the fiscal ratios of Himachal Pradesh to be higher than budgeted in FY25. The debt of the state has been budgeted at 42.5% of GSDP in FY25, higher than the indicative debt estimate of 32.8% of GSDP provided by the 15th Finance Commission, it had noted.
Paras Jasrai, Senior Economic Analyst, India Ratings and Research also pointed out that Himachal Pradesh is a fiscally constraint state. “The fiscal indicators have deteriorated after FY22. The revenue deficit has been budgeted at 2% of GSDP which we think is an underestimate given the optimistic assumptions regarding own revenues and GSDP growth. As a result, the fiscal deficit is also likely to be higher than the budgeted 4.8% of GSDP in FY25,” he said.
The committed expenditure in the state remains quite high due to elevated debt (resulting in high-interest payments), high salaries, and pension expenditure (due to a sizeable share of government employees and their salary structure being better than various states). “The debt to GSDP ratio has also remained above 40% for the past few years featuring in the list of top leveraged states,” he said.
Salaries and Pensions
An analysis by PRS Legislative Research of the state’s Budget had noted that in FY25, the state’s total expenditure excluding debt repayment is estimated at Rs 52,965 crore, an increase of 0.4% over the revised estimates of FY24. In 2024-25, Himachal Pradesh is estimated to spend Rs 33,463 crore on committed expenditure, which is 79% of its estimated revenue receipts, the report had highlighted. “This comprises spending on salaries (41% of revenue receipts), pension (24%), and interest payments (15%),” it said, adding that in FY 24, the expenditure towards pensions is estimated to be 4% higher than the budget estimate.
The spending on salaries and pensions is Budgeted at Rs 27,208 crore in FY25 as against Rs 25,152 crore in the revised estimate of FY24.
Significantly, the Congress-ruled state is one of the five states that have moved to the Old Pension Scheme that has a defined pension.
“In 2023-24, Himachal Pradesh is estimated to spend 21% of its revenue receipts on pension payments which is the highest amongst all states. This is estimated to increase to 24% in 2024- 25,” said PRS Legislative Research. Reverting to the OPS may reduce their pension expenditure in the short term, it said, but warned that from 2034 onwards when the employees who joined after 2004-05 under NPS begin to retire, the costs may become more visible.
Subsidy Bill
As part of its move to cut down on expenditure, the state is also now trying to rationalise freebies and welfare schemes as well as subsidies on power as well as subsidies on 14 sectors. While the Sukhu government had introduced the OPS and the Rs 1,500 scheme for every woman under the Indira Gandhi Pyari Behna Sukh Samman Nidhi Yojna, the previous BJP government in the state had introduced a power subsidy scheme under which every household received 125 units of free electricity. Before the elections, Congress had promised to increase this to 300 units but the scheme has now been withdrawn due to the state’s fragile financial position.
According to the PRS Legislative Research note, Himachal is estimated to spend Rs 1,189 crore on subsidies in 2024- 25 as per FRBM statements. This amounts to 3% of its revenue receipts and it is estimated to decrease to 2% in 2026-27. In 2024-25, Himachal plans to subsidise energy, farm, transport and food sectors. In 2022-23, Himachal spent 53% of its subsidies on the energy sector, followed by 17% on procurement of grains and oils for food supply. In 2021-22 it spent 35% and 26% respectively.
Faltering Revenue
For FY25, Himachal Pradesh has budgeted revenue receipts (excluding borrowings) at Rs 42,181 crore, an increase of 4% from the RE of Rs 40,446 crore for FY24. Of this, the state’s own tax revenue is estimated to grow by 18% to Rs 15,101 crore while the share in central taxes is estimated to grow by 15% to Rs 10,124 crore.
India Ratings said that the state would be mopping lesser from its own taxes which may lead to lower-than-budgeted revenue receipts in FY25. The state’s own non-tax revenue and transfers from the union government are broadly expected to be in line with the budgeted figure.