Freebies, declining central grants: Himachal's uphill task to fix finances

State has announced it will impose electricity consumption cess and defer salaries of ministers for two months

The Congress government in Himachal Pradesh will impose electricity cesses and rationalise subsidies, realising it has to put its shaky finances in order. The state used to run a surplus on the revenue balance until three years back, barring a minor deficit in the pandemic year of 2020-21. Subsidies have been blamed for Himachal's problem but that would be lopsided: Declining central grants are a reason too.

The state's committed expenditure constitutes around 80 per cent of revenue receipts. While many say the state hurt itself by returning to the old pension system last year, liability on this count is not immediate and would fall on future governments – probably from FY35. But committed expenditure increased significantly in 2022-23, a time when the state was first ruled by the Bharatiya Janata Party and then the Congress.

Subsidies also increased in 2022-23. The state has committed to bring subsidies down drastically in FY25, but its performance in the first four months does not indicate that it can meet projections unless it axes some parts of subsidies (chart 1).

While the state's own tax revenues (OTR) are rising, central grants have come down drastically. Before FY24, central grants comprised half the revenue receipts in some years or at least more than 40 per cent. Now, central grants are projected to account for less than even one-third of revenue receipts (chart 2). 

It should be noted that if the grants remain the same in FY25 as was in the pre-election year of 2021-22 at Rs 17,633 crore, the state's projected revenue deficit would be wiped out. Grants – projected at Rs 13,287 crore for FY25 – are given by the Centre on the recommendations of the Finance Commission (15th for this period).

Himachal's fiscal deficit has been much higher than the permissible limit of 3.5 per cent of gross state domestic product (GSDP) for two financial years. For FY25, it was pegged at close to 5 per cent. Consequently, it is difficult to bring the state's debt to below 40 per cent of GSDP (chart 3).

The state assembly on Tuesday passed a Bill to impose a milk cess of 10 paise per unit on electricity consumption and an environment cess ranging from 2 paise to Rs 6 per unit. The government earlier decided to defer for two months’ salaries and allowance of ministers, chief parliamentary secretaries, chairmen and vice-chairmen of boards and corporations besides persons holding cabinet ranks.