Saturday, 05 Oct, 2024
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The state is experiencing a severe fiscal crisis, with its deficit significantly surpassing the permissible 3.5% of GSDP. For FY25, the deficit is projected to hit around 5%. The economic challenges are driven by heavy borrowing, increasing pension and salary expenses, generous freebies, and inadequate revenue generation.
The recent actions of the Sukhvinder Singh Sukhu-led Congress government in Himachal Pradesh highlight the severity of the financial crisis gripping the state. The government’s moves reflect the mounting fiscal pressures and the urgency to address the deepening financial challenges. The government is preparing to introduce an electricity cess and rationalise subsidies to address its precarious financial situation. Just three years ago, the state had a revenue surplus, apart from a small deficit in 2020-21. Currently, committed expenditures consume around 80 per cent of the state’s revenue receipts, significantly limiting fiscal flexibility.
For the first time in Himachal’s history, around 2 lakh employees and 1.5 lakh pensioners did not receive their salaries and pensions on September 1 due to a deepening financial crisis. The state is burdened with a huge debt of approximately Rs 94,000 crore, aggravated by escalating debt levels and rising costs of welfare schemes. This severe fiscal strain has compelled the government to take new loans just to manage existing debt. With liabilities approaching Rs 10,000 crore, further delays in payments to employees and pensioners are expected.
Chief Minister Sukhu has said that the delay in salary and pension payments is due to the government’s efforts to carefully map expenditures and receipts. This approach aims to manage resources more prudently amid the state’s financial difficulties.
The monthly expenditure on salaries and pensions in Himachal amounts to Rs 1,200 crore and Rs 800 crore, respectively, bringing the total to Rs 2,000 crore. The financial crisis has persisted since the current government assumed office on December 11, 2022.
Himachal’s fiscal situation reflects a complex scenario. Despite an increase in the state’s committed expenditure and subsidies since FY22-23, there are challenges in aligning with projected reductions in subsidies for FY25. The state’s performance in the initial months of FY25 indicates potential difficulties in meeting these targets without significant cuts to subsidies.
Additionally, while the state’s own tax revenues are on the rise, central grants have declined. Previously, central grants accounted for up to half or more of the revenue receipts, but they are now projected to contribute less than a third of the revenue receipts. Experts are of the view that the cut in central grants, combined with rising subsidies and committed expenditures, compounds the state’s financial strain.
In recent months, the cash-strapped state has implemented several measures to improve its financial health. The government has notably discontinued the power subsidy scheme, which offered 125 units of free electricity to households in the tax-paying bracket. This decision was driven by the electricity board’s struggles to pay employee salaries and the need to address liabilities from subsidies granted by the previous administration.
If Himachal’s central grants in FY25 were to match the Rs 17,633 crore received in the pre-election year of 2021-22, it would effectively eliminate the projected revenue deficit for the state. Currently, grants for FY25 are projected at Rs 13,287 crore based on the 15th Finance Commission's recommendations.
The state has been struggling with a fiscal deficit significantly above the permissible 3.5 per cent of gross state domestic product (GSDP), with FY25’s deficit estimated around 5 per cent. More importantly, the economic distress is largely due to heavy borrowing, increasing pension and salary expenditures, generous freebies, and inadequate revenue generation. With a per capita debt of Rs 1.17 lakh, the state ranks second in the country, just behind Arunachal Pradesh.
Himachal’s fiscal deficit surged more than 1.5 times, climbing from 4.05 per cent of GSDP in 2021-22 to 6.4 per cent in 2022-23. For 2023-24, the Revised Estimate (RE) projects a fiscal deficit of 5.9 per cent, up by 130 basis points from the initial Budget Estimate. The revenue deficit also increased to 2.6 per cent of GSDP in the Revised Estimate, compared to 2.2 per cent in the Budget Estimate. The state’s revenue expenditure constitutes about 90 per cent of its total expenditure, one of the highest ratios in the country.
The Fiscal Responsibility and Budget Management Review Committee’s 2018 recommendation set a ceiling of 20 per cent for debt-to-GSDP ratios for states. However, data for 2023-24 reveals that 12 states exceeded a 35 per cent debt-to-GSDP ratio, and approximately 24 states had debt exceeding 20 per cent of their GSDP.
(This is the first part in the India Tracker data journalism series “When Welfare Means Farewell to Prudence.”)
