Himachal Pradesh Faces Severe Fiscal Stress After RDG Withdrawal In 2026

Will Himachal Pradesh, a state where governance alternates between the Congress and BJP every five years, be able to withstand the Rs 6,000 crore annual blow caused by the withdrawal of the Revenue Deficit Grant (RDG)?

The question is significant for the resource-starved and debt-ridden state, which has long depended on the RDG from the Union government to remain financially viable since its formation in 1971. The withdrawal of RDG now poses a serious challenge not only to the incumbent Congress government but also to the state’s broader economy.

It is a constitutional mechanism evolved under Article 275(1) to compensate states whose regular income is not enough to meet routine expenses such as salaries, pensions, interest payments, and basic public services.

But, from the year 2026-27, Himachal Pradesh will not receive RDG funding anymore, practically snapping the crucial fiscal lifeline for the Congress-ruled state. The 16th Finance Commission has recommended the discontinuation, leaving a significant gap of Rs 6,000 crore uncovered between the state’s income of Rs 42,000 cr (including a borrowing limit of Rs 10,000 cr) and expenditure of a whopping Rs 48,000 cr.

“This is the first time in the state’s history that neither the 16th Finance Commission nor the central government has made any analysis of how a state will survive in a situation of acute fiscal crisis when we have to borrow from the open market to repay our previous loans and the interest payments. It’s a grave injustice with 75 lakh people,” says Chief Minister Sukhwinder Singh Sukhu.

As per him, in a state like Himachal Pradesh, where the Revenue Deficit Grant accounts for 12.71 percent of its budget, the second-highest in the country after Nagaland (17.21 percent), its withdrawal could have a devastating impact on the state’s fiscal health. While larger states or those with a stronger resource base may be able to absorb such a shock, for Himachal Pradesh, the loss will significantly strain finances and undermine its ability to meet even routine expenditures and committed liabilities.

But how did the situation reach this level? What structural weaknesses, policy decisions, or political dynamics contributed to the crisis? And did the current situation rise suddenly? Or is it the culmination of fiscal stresses that had been building over time?

Senior BJP leader and two-time Chief Minister Prem Kumar Dhumal says the withdrawal of RDG was neither sudden nor unexpected.

“It was known well in advance that RDG would end after March 31, 2026. Despite this, the state government failed to plan alternative revenue streams or enforce fiscal discipline. Now, projecting RDG phase-out as a shock is misleading the public,” he said and added, “the present crisis is self-inflicted, driven by uncontrolled spending rather than structural constraints alone ”.

After the RDG shock, Chief Minister Sukhu, who was quick to convene a cabinet meeting and call for a presentation by the state’s Principal Secretary (Finance) Devesh Kumar, on its impact on the services and governance, admits, “The government has to take some harsh decisions”

The state’s debt has crossed Rs 1 lakh crore, becoming a chronic burden created by successive Congress governments since the Virbhadra Singh era and compounded by the previous BJP government, which also raised loans despite getting Rs 54,296 cr as RDG and another Rs 16,000 cr as GST compensations.

A senior minister admits, “The crisis is not sudden but a cumulative effect of burgeoning debt burden, high-cost spending, uncontrolled and non-essential expenditure, expansion of political appointments, and spending on new vehicles and facilities. This contradicts the principle of fiscal prudence."

Devesh Kumar, in his presentation before the cabinet and later for MLAs, set out a clear outline. “The picture is very grim. We may have to stop development works, abolish all sanctioned posts lying vacant for more than two years, and withdraw all subsidies and financial support being extended to various sections of society, including social welfare schemes, monetised government assets, and private entities like HPSEB Ltd,” he said.

Retired HAS officer and financial expert D. K. Manta said the RDG withdrawal is set to have a cumulative and far-reaching impact on the state. Till now, the state (since 1971) has been a significant part of its budget funding from the centre up to Rs 37,000 cr in the form of RDG, but now there is a lingering fear about tough days ahead for the state.

The state’s own revenue is approximately Rs 18,000 crore. Its share in central taxes is estimated at Rs 13,950 crore. With borrowing capped at Rs 10,000 crore, total available resources come to around Rs 42,000 crore against an estimated expenditure of Rs 48,000 crore, leaving a gap of Rs 6,000 crore, he explains.

Further, the state has to repay Rs 13,000 cr as committed liabilities, including loan repayments. Moreover, Rs 8,500 cr as arrears of revised salaries and Rs 5,000 cr as arrears of Dearness Allowance are also pending. This clearly indicates that the developmental works, the centrally funded schemes where a matching grant is required, social security pensions, pay and pension arrears, and even basic subsidies will face cuts.

The state government did make some efforts to mobilise additional sources, proposing the imposition of a power cess, and earned an additional Rs 600 cr from excise, fought a legal battle for a higher share in royalty in the JSW-owned hydel project, and got its right invoked at Hotel Wildflower Hall by the Supreme Court—an additional resource of approximately Rs 3000 cr.

“But under the present circumstances, the political leadership must be willing to lead by example—by cutting down allowances and giving up lavish entitlements—before any harsh measures are imposed on the public,” Manta feels.

Manta also outlines the options before the government: increasing non-tax revenue, cutting non-essential expenditure, and prioritising essentials. Better utilisation of centrally funded schemes such as PMGSY and urban housing, and plugging tax leakages instead of burdening the public through subsidy withdrawals or freezing social security measures.

Being a hill state with tough terrains, difficult topography, and 29.5 percent of land under forests/tree cover, the state can't use its entire land for industry and other non-forest purposes for revenue generation.

The Chief Minister has been vehemently asking for the setting up of a dedicated ‘Green Fund’ for the Himalayan states for preserving the forests and ecology. He has also set up demand for forcing a higher share of royalty in the hydel projects, at least 50% royalty in the power projects having repaid their costs and returning those projects to the state, which have been completed for 40 years, as some of the measures to compensate the state for the loss caused by RDG withdrawal.

He points out a direct loss of tax revenue due to the GST regime, as it has been a producer state, not a consumer-based economy. “Despite producing nearly 35% of the country’s pharmaceuticals, Himachal Pradesh receives very little tax revenue,” he said, adding that GST disadvantages manufacturing hill states.

With state assembly elections having just two years, an intense political slugfest in the state has already intensified. Instead of announcing any concrete roadmap, the state government has the state assembly’s budget session to “turn the tables” on the BJP and also the centre, though the Chief Minister has talked about meeting Prime Minister Narendra Modi collectively with sitting MPs (from Himachal) and Leader of Opposition Jairam Thakur.

Leader of the Opposition, Jairam Thakur, on the other hand, says the state government is preparing to place the burden of its failures on the people of the state. On one hand, he was draining the state's exchequer by giving away cabinet ranks to his close aides, while on the other hand, the government is now planning to impose heavy taxes on the people to recover losses. And how about “false” poll guarantees, including the Old Pension Scheme (OPS), Rs 1500 per month to women, one lakh jobs to youths, and making Himachal a self-reliant state in 2026 or the best economy of the country by 2032?

He says during the past three years, the government increased salaries and allowances of ministers, MLAs, and chairmen/vice-chairmen of boards and corporations up to 24 percent, appointed a dozen advisors, ordered three dozen political appointments, and appointed around 75 to 80 additional deputy advocate generals.

On the logical side the 16th Finance Commission seems to have failed to recognise the structural disabilities of hill states and prepared its report by "putting apples among oranges.”