Context:

• The state government of Himachal Pradesh is undertaking multiple strategies to meet financial challenges to ensure economic stability and growth.

Key Points:

Current fiscal landscape

• The fiscal deficit of Himachal Pradesh is a pressing concern, with the state targeting a fiscal deficit of 4.7% of its Gross State Domestic Product (GSDP) for the fiscal year 2024-25, amounting to approximately ?10,784 crore.
•  However, revised estimates for 2023-24 indicate a higher fiscal deficit of 5.9% of GSDP, up from an initial estimate of 4.6%. This increase is primarily attributed to escalating liabilities, including salaries, pensions, interest payments, and social security obligations.
• The state's debt is projected to reach 42.5% of GSDP in FY25, significantly exceeding the 15th Finance Commission's indicative debt limit of 32.8% of GSDP. Such a high debt burden raises concerns about the sustainability of the state's finances and its ability to fund essential services.

Revenue Deficit

• The revenue deficit, defined as the gap between revenue expenditure and revenue receipts, poses another significant challenge for Himachal Pradesh. For the fiscal year 2024-25, the revenue deficit is estimated at 2% of GSDP, or ?4,513 crore. While this figure is an improvement from the revised estimates of 2.6% for 2023-24, it still represents a substantial financial strain on the state's budget.
• The government has set an ambitious goal to eliminate the revenue deficit by 2026-27, but achieving this target will require concerted efforts and effective fiscal management.
• Historically, Himachal Pradesh has relied heavily on grants from the central government to bridge its revenue deficit. In 2021-22, the state received ?10,249 crore in grants, but projections indicate a sharp decline to ?3,257 crore by 2025-26. This reduction necessitates that the state government explore alternative revenue sources and implement cost-cutting measures to maintain fiscal balance.

Strategies for financial stability

In response to the mounting financial pressures, the Himachal Pradesh government is adopting a multi-faceted approach to enhance its fiscal health. Key strategies include:

• Revenue augmentation: The government is actively exploring various avenues to increase its revenue base. This includes enhancing tax collection efficiency and broadening the tax base to capture more economic activities.
• Expenditure rationalization: Efforts are underway to identify and eliminate unnecessary expenditures. By streamlining government operations and prioritizing essential services, the state aims to achieve a more balanced budget.
• Improving Tax-to-GSDP Ratio: The state government has set a target to increase its own-tax-to-GSDP ratio from an estimated 6.6% in 2024-25 to 7.1% by 2026-27. This goal reflects a commitment to enhancing the state's revenue-generating capacity.
• Introduction of new levies: In a bid to generate additional revenue, Himachal Pradesh introduced a cess on water used for power generation, projected to yield ?4,000 crore. Additionally, the government anticipates revenue from a milk cess of ?116 crore in 2024-25 and expects a 36% increase in revenue from taxes and duties on electricity.