Deep in debt, Himachal Pradesh is a case study in how not to run a state

His childhood sweetheart is from a higher caste and a government job in Himachal Pradesh will enhance his status to seek her hand. “The Congress government came to power in the state promising 500,000 government jobs. It is two years, and they have not created a single job,” he fumes. “I am running out of time and will never forgive them,” he adds.

Jobs is not the only commitment the Congress government in Himachal Pradesh has failed to keep. It promised 300 units of free power for every household; ₹1,500 cash compensation for every woman; return to the old pension scheme (OPS); minimum support price for milk and cow dung purchase at ₹2 per kilogram, among others. While the shift to OPS has been executed, most other promises have either been diluted or ignored.

The reasons are not far to seek. The state’s financial position is such that it is struggling to manage its day-to-day operations. Salaries have been delayed. Most contractual payments have been held up. One such delay turned into a major embarrassment recently. The Himachal Pradesh high court, at the end of November, ordered the attachment of Himachal Bhawan, the state’s guest house in New Delhi, for non-payment of ₹64 crore to a power company. The government hurriedly deposited the amount in the court’s registry to prevent the attachment.

The state’s expenses far outstrip its revenue. Committed expenditure, those on salaries, pensions and interest, alone accounts for 67% of its revenue expenses. That has left very little space for capital and other developmental expenses. In 2023-24, the state posted a revenue deficit of 2.6% and a fiscal deficit of 5.9%, way above the target fixed for the states. Consequently, its borrowings are significant.

“The state is in a debt trap,” says Paras Jasrai, economist at India Ratings and Research. “When more than two-thirds of your borrowing goes towards servicing your existing debt, you know things are bad,” he adds.

Himachal Pradesh’s chief minister, Sukhvinder Singh Sukhu, who also handles the finance portfolio, did manage to increase revenue through higher taxes in his latest budget. While he blames the previous government, led by the Bharatiya Janata Party (BJP), for the financial crisis, he is confident of turning things around. “My vision is to make Himachal Pradesh self-reliant by 2027,” he tells Mint.

That is a utopian dream—populism has seeped deep inside people’s psyche, and unpopular decisions such as raising taxes, cutting expenses or even seeking private investment can invariably result in the government being voted out of power. If India needs an example of what unbridled populism can do to a state, Himachal Pradesh is the case study to read.

Economically unviable

The financial vulnerability began on 25 January 1971 when then Prime Minister, Indira Gandhi, announced Himachal Pradesh as the nation’s 18th state from Shimla’s The Ridge, a popular tourist spot.

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“A committee that was set up earlier to look into Himachal’s statehood had clearly stated that it was unviable on economic grounds. Granting statehood was a political decision,” says Sashikant Sharma, a professor at Himachal Pradesh University.

The state’s population was less and so were other resources. Its hilly and tough geo-climatic conditions made economic activities challenging. Himachal Pradesh was therefore granted the special category status, and it received the bulk of the funds from the Centre.

All was good in the first two decades, between 1971 and 1990. Most of the state’s financial needs were met by the Centre. “The state saw a high level of development in this period,” says Prabodh Saxena, chief secretary, government of Himachal Pradesh. Investments went into education and healthcare; the state was fully electrified by the 1990s. “Himachal soon came second, after Kerala, when it concerned sustainable development targets,” says Saxena. “No other state has witnessed such changes in just one generation.”

At the same time, policymakers made no significant efforts to raise revenue. Why do it when you are getting all the funds from the central government?

“It became customary for the government to present tax-free budgets,” says Saxena. Also, with limited private sector play, government jobs became the most sought-after occupation. Politicians milked this demand by appointing people from their voter base in government jobs and soon the size of the government swelled. The number of government employees rose to over 200,000 for a population of around 7.5 million in 2024. Add to this para workers (those working in anganwadis, health and mid-day meal centres) numbering around 18,000. Not surprising that the state’s salaries and pension bill alone account for 57% of its overall revenue expenses in 2023-24.

End of largesse

The Ninth Finance Commission (appointed in 1987) ended the largesse the Himachal Pradesh government was enjoying from the Centre. With a mandate to cut the revenue deficit of the states, it introduced changes in how special category states were funded. The flow of funds from the Centre dropped drastically.

“The choice in front of the government then was to either rework its finances by cutting expenses and raising resources or continue the spending binge through borrowings. Unfortunately, the policymakers at that time chose the latter,” says Suresh Bharadwaj, BJP leader and a former minister.

The state continued with its tax-free budgets and populist spending—this time funded by debt. At one point (in 1999-2000), its outstanding debt touched 79% of gross state domestic product (GSDP). As the situation spiralled out of control, efforts were made to set right the finances. A white paper was published in December 1999 highlighting the precarious state of finances and the need for a ‘no tax budget’ culture to go. Professional tax was levied on doctors, lawyers and chartered accountants. A massive hue and cry resulted in it being withdrawn almost immediately. Similarly, attempts to cut back unnecessary expenses were made, such as closing unviable schools, base recruitment in the government and so on. They led to protests by the opposition.

“In an attempt to cut losses in state-run hotels, plans were made to hand over the management to the private sector. It was not an outright sale, but still, the opposition screamed ‘Himachal for sale’. The plan was dropped,” recalls Sharma.

Following these moves, the BJP government of the day was promptly voted out of power. The message was clear—no new taxes or cuts in expenses. “Clearly, there is no political consensus on how to deal with the precarious finances,” recalls Saxena.

Enter freebies

For much of the last two decades, Himachal Pradesh’s financial position remained brittle. While its borrowings continued to rise, it still managed a revenue surplus occasionally. The culture of freebies that entered the state a few years ago drove the last nail in the coffin.

The BJP came to power in 2017, promising 125 units of free power. Towards the end of its term, it stopped charging rural households for water. In 2022, months before the state assembly election, it announced a significant pay revision for state government employees who, along with their dependents, account for almost 15% of the electorate. Salary costs in 2022-23 jumped by 26% and pension by 45%, causing the government’s net borrowing to jump to ₹12,912 that year from ₹2,735 crore in 2021-22. Government employees were still unhappy.

Congress promised the moon. People fell for it and now they feel cheated.
— Suresh Bharadwaj

“Today, the government owes its employees ₹10,600 crore. It has money to give ₹1,500 per month to women but not pay the workers for their hard-earned labour,” says Sanjeev Sharma, president, HP Secretariat Services Employees Association.

In 2022, Congress came to power by bettering BJP in offering freebies and other welfare as mentioned earlier. “Congress promised the moon. People fell for it, and now they feel cheated,” says BJP leader Bharadwaj. The only scheme, he says, that has been fully implemented is the shift to OPS, as it does not involve any immediate cash outflow. “But this move will cost the state dearly going forward,” he adds. The number of pensioners is expected to exceed those in employment soon.

Other schemes have been diluted or ignored. The government has brought in a lot of new restrictions for those qualifying for ₹1,500 cash compensation scheme for women. “Earlier, it was for all women. Now, most of them don’t qualify,” says Bharadwaj. “The biggest joke is the promise of 500,000 government jobs,” says Bharadwaj. “How can you make such a promise when the total number of government staff presently is just 200,000?” he asks.

Declining revenue

Congress government’s giveaways coincided with declining revenue, especially from the Centre. “Between the 14th Finance Commission and the 15th, the revenue deficit grant (RDG) that the state receives reduced by ₹3,000 crore,” says Saxena.

That apart, RDG payment has been structured in a tapered manner. “Between the first year of the 15th Finance Commission period (2020-21) and last year (2025-26), the shortfall is almost ₹7,000 crore. We are trying to bridge this gap,” says chief minister Sukhu.

That apart, GST compensation that the state received of around ₹2,624 crore per year has also ended. To make matters worse, the borrowing limit of all states has been reduced to 3% of GSDP and that means ₹1,057 crore less funds.

“Higher expenses and lower revenue have hurt the cash flows badly,” says Saxena. The extent of the problem can be gauged from how the state has dipped into the ‘ways and means advance’—a window provided by India’s central bank to help states tide over temporary mismatches in the cash flows of their receipts and expenditure—to survive.

“In April-August this year, Himachal Pradesh has tapped ways and means advance of ₹1,736 crore as against ₹2,083 crore it took in entire 2023-24,” says India Ratings’ Jasrai.

Way forward

Chief minister Sukhu’s dream of pulling the state out of the financial mess and making it self-sustaining hinges on the government taking some drastic action.

“There is an urgent need for expenditure control and re-allocation of resources. State welfare schemes have to be revisited and aligned with those of the Centre. A serious manpower review needs to be done,” says Basu Sood, advisor (planning), government of Himachal Pradesh. He also emphasises the need for a mindset change to explore public-private partnerships.

A start has been made. “We have raised ₹2,200 crore this year by plugging loopholes and streamlining liquor auctions. We are also offering freebies in a targeted manner. The poor need all the help and not everyone,” says Sukhu. More reforms are on the way, the chief minister adds.

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What about political consensus for drastic reforms? “Difference of opinion will be there among political parties, but we are convincing the people directly,” he says.

Not all are convinced that these steps will succeed. Politically, the Congress party is on the back foot—the BJP won all the four parliamentary seats in the 2024 elections. They fear more populism and this has fuelled cynicism.

There’s a murmur doing the rounds in the corridors of Ellerslie House, the state secretariat. The only way to set things right, some say, is to make Himachal Pradesh a union territory. The Centre then can pump in funds and ease the financial crisis. Once that is done, statehood can be restored.

All these conversations are a reflection of the extent to which Himachal Pradesh is addicted to populism—and the enormity of the task before the current government.