Himachal Pradesh is staring at serious financial trouble after the 16th Finance Commission decided to discontinue the revenue deficit grant (RDG), a key source of support for the hill state. The decision is expected to sharply worsen the already fragile fiscal position of the state, which is struggling with high debt, limited revenue sources, and rising expenditure.
The setback comes at a sensitive time, as chief minister Sukhvinder Singh Sukhu has met Union finance minister Nirmala Sitharaman three times in the past four months. During these meetings, he sought a special financial package from the Centre, an increase in the state’s borrowing limit, and an additional ₹50,000 crore Green Fund for hill states to deal with environmental and developmental challenges. However, the discontinuation of RDG has come as a major blow to these efforts.
Over the last five years, Himachal Pradesh received around ₹38,000 crore through the revenue deficit grant. Given inflation and growing costs, the state expected this amount to rise to nearly ₹50,000 crore over the next five years. Instead, the withdrawal of RDG is likely to cost the state between ₹40,000 crore and ₹50,000 crore during this period, officials said.
Himachal Pradesh has a total annual budget of around ₹58,000 crore, but a large part of this money is already tied up in fixed expenses. Salaries, pensions, interest payments, and other mandatory costs consume most of the budget, leaving very little room for development work or welfare schemes.
The state’s debt has crossed ₹1 lakh crore, making it difficult to manage daily financial needs without central assistance. Chief minister Sukhu described the decision to end the revenue deficit grant as a “betrayal” and said it violates the constitutional rights of states under India’s federal system.
“Small and mountainous states like Himachal Pradesh can never become revenue surplus because of their geography and limited resources. This is a globally accepted reality for mountain regions,” Sukhu said. He added that if the Centre withdraws RDG, states like Himachal should be given greater freedom to raise taxes on their own resources.
Sukhu also pointed out that the Centre did not approve a special disaster relief package, even after the state suffered losses of nearly ₹15,000 crore due to recent natural disasters. He warned that without adequate support, the state’s goal of becoming self-reliant would be severely affected.
Deputy chief minister Mukesh Agnihotri echoed similar concerns, calling the move a “double blow” for Himachal Pradesh. He said the end of RDG, following the earlier withdrawal of GST compensation, would result in an annual loss of over ₹10,000 crore.
“Ending the revenue deficit grant is a policy injustice. It threatens to stop ongoing development projects and welfare schemes,” Agnihotri said. He stressed that since 1952, there has been a national understanding that the Centre would provide special financial help to Himachal due to its border location and difficult terrain.
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Defending the Finance Commission’s decision, BJP MP Anurag Singh Thakur said the move was based on financial realities. He argued that revenue deficit grants were meant to be temporary and transitional, not permanent.
Thakur said Himachal Pradesh’s share from the divisible pool of central taxes has increased, and the commission decided to move away from routine grants because of weak tax collection and high committed expenditure in states like Himachal. He also compared Himachal’s performance with neighbouring Uttarakhand, saying Himachal’s capital expenditure remains low.
“When most of the budget goes into salaries, pensions, and debt repayment, very little is left for productive investment. The path to long-term prosperity lies in fiscal discipline and better use of resources,” Thakur said.
However, state industry minister Harshwardhan Chauhan dismissed these claims, saying the increase in Himachal’s tax share would be small. “The annual increase will be only ₹1,500 crore to ₹2,000 crore, while the loss from RDG will be close to ₹8,000 crore every year,” he said.
Economic experts believe that while central support is important, the state must also look inward. Former planning secretary Devinder Kumar Sharma said the real issue is not borrowing, but how borrowed money is used.
“Loans should be used to build assets and fund development. The problem starts when borrowing is used to pay salaries and routine expenses,” he said, calling for strict fiscal discipline.
Dr Sanjeev Kumar, chairman of the economics department at Himachal Pradesh University, said complete financial independence from the Centre is unrealistic in a federal system. However, he stressed the need to reduce dependence by strengthening local revenue sources.
“Tourism is the lifeline of hill states like Himachal. The state must invest more in tourism and also ensure it gets its rightful dues from power companies,” he said.
As political debate continues between the state and the Centre, Himachal Pradesh faces tough choices ahead. Without the revenue deficit grant, the state will need to carefully manage spending, boost revenue, and push for special support, or risk slipping deeper into fiscal turmoil.
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