Himachal Pradesh Chief Minister Sukhvinder Singh Sukhu, who also oversees the finance portfolio, recently presented the 2025-26 state budget, aiming to balance fiscal prudence with developmental aspirations. The budget emphasises tourism expansion, green energy, and rural upliftment as key growth drivers. However, persistent financial challenges-including declining central grants, rising debt, and increasing revenue expenditure-continue to pose significant hurdles to fiscal management.
Plummeting central grants
Himachal Pradesh’s fiscal distress stems from policy shifts and structural financial limitations. A major setback has been the sharp reduction in central grants, particularly the Revenue Deficit Grant (RDG), which dropped from Rs 10,949 Crore in 2021-22 to Rs 3,257 Crore in 2025-26. Additionally, the withdrawal of GST compensation has led to a cumulative revenue shortfall of Rs 9,478 Crore, further exacerbating the fiscal deficit.
The state’s debt burden has surged to Rs 1,04,729 Crore, including Rs 29,046 Crore in liabilities inherited from the previous BJP-led administration. Capital expenditure has also taken a significant hit, declining by 46.58 per cent from Rs 8,485.83 Crore in 2024-25 to Rs 3,941.85 Crore in 2025-26. This substantial reduction restricts long-term infrastructure investments, raising concerns about future economic expansion.
The revenue deficit stands at Rs 361 Crore (0.83 per cent of GSDP), while the overall fiscal deficit remains high at Rs 10,338 Crore (4.04 per cent of GSDP), reflecting ongoing financial strain despite expenditure control efforts. The slight reduction in the overall revenue deficit-from Rs 6,486 Crore to Rs 6,390 Crore-offers little relief, as fiscal imbalances continue to hinder development prospects.
In contrast, the Union Budget 2025-26 has allocated Rs 11.21 Lakh Crore for capital expenditure, constituting 3.1 per cent of the national GDP, a 10.1 per cent increase over the previous year’s revised estimate. This disparity in resource allocation leaves states like Himachal Pradesh struggling to secure adequate fiscal support.
Pathways to financial stability
Himachal Pradesh’s fiscal crisis calls for a multi-pronged approach to revenue generation, ensuring financial stability while maintaining developmental momentum. Given the state’s heavy reliance on central grants and borrowings, the government must diversify its revenue streams through effective
taxation policies, asset monetisation, tourism expansion, and private sector participation. Below are key areas requiring focused action:
Enhancing tax compliance
Improving tax compliance and minimising revenue leakages are crucial for fiscal recovery. The state must focus on:
Expanding the tax base: Increasing the number of taxpayers through effective registration drives and stricter enforcement of tax laws.
Digital tax governance: Implementing advanced digital tracking systems to monitor tax collections, curb evasion, and streamline compliance.
Rationalising tax incentives: Reviewing and eliminating unnecessary tax exemptions that lead to revenue losses.
Strengthening enforcement: Enhancing audit mechanisms to detect tax evasion while promoting voluntary compliance.
Rationalising subsidies
Himachal Pradesh bears a high subsidy burden, which, while essential for social welfare, often leads to fiscal strain when not managed effectively. A targeted subsidy framework is necessary to balance welfare with financial sustainability. Key measures include:
Identifying non-essential subsidies: Phasing out benefits that primarily aid economically well-off sections while protecting critical subsidies for healthcare, education, and agriculture.
1. Direct Benefit Transfers (DBT): Ensuring subsidies reach intended beneficiaries directly, reducing middlemen and leakages.
2. Performance-based subsidies: Linking benefits to efficiency and sustainability, particularly in the power sector, where leakages are common.
3. Encouraging alternative funding models: Exploring Corporate Social Responsibility (CSR) partnerships to support social welfare initiatives.
By curbing wasteful subsidies, the government can reallocate resources to productive investments, fostering long-term economic stability.
Monetising state assets
Himachal Pradesh possesses vast underutilised assets in land, tourism, hydroelectricity, and public infrastructure. Monetising these resources can generate substantial revenue.
a) Land monetisation: Leasing state-owned land for commercial and industrial use while ensuring sustainable development.
b) Maximising hydroelectric revenue: Enhancing revenue-sharing agreements with power producers and improving efficiency in the hydropower sector.
c) Revamping state properties: Converting unused government buildings into revenue-generating assets like hotels, business centers, or cultural hubs.
d) Auctioning mineral resources: Regulating and monetising mineral deposits through transparent and competitive bidding processes.
Effectively utilising state assets can reduce fiscal dependence on external sources and create sustainable revenue streams.
Seeking ecological compensation
As a major ecological contributor, Himachal Pradesh provides critical environmental services, including carbon sequestration and water conservation. However, these contributions often go uncompensated in national financial allocations. The state must aggressively advocate for ecological compensation, estimated at Rs 90,000 Crore annually, through:
Financial incentives for forest conservation: Seeking compensatory grants from the central government.
i) Monetising carbon credits: Participating in national and international carbon trading markets.
ii) Eco-taxation: Imposing green taxes on businesses impacting the environment, with revenues directed toward conservation efforts.
iii) Securing environmental compensation will provide much-needed fiscal support while reinforcing Himachal’s commitment to sustainability.
Boosting tourism revenue
Tourism is a cornerstone of Himachal Pradesh’s economy, yet its revenue potential remains underutilised. The government must focus on:
i) Eco-tourism and adventure tourism: Developing sustainable resorts, trekking trails, and adventure sports facilities.
ii) Religious tourism infrastructure: Enhancing connectivity and amenities around pilgrimage sites.
iii) Cultural and heritage tourism: Restoring historical sites and promoting Himachal’s unique culture and handicrafts.
iv) Better taxation and regulation: Ensuring proper taxation of tourism-related businesses to minimise revenue leakages.
v) With strategic investments and promotional efforts, tourism-driven revenue can significantly reduce dependence on external grants.
vi) Himachal Pradesh stands at a critical economic juncture where strategic action is essential to overcome fiscal distress.
By diversifying revenue streams, strengthening tax governance, optimising state resources, and fostering private sector collaboration, the state can navigate financial challenges while sustaining economic growth.
A well-implemented, multi-sectoral strategy will not only bridge fiscal deficits but also position Himachal Pradesh as a model of financial resilience.
(The writer is a strategic affairs columnist and senior political analyst. Views expressed are personal)
