16th Finance Commission Report Highlights Fiscal Challenges in Himachal Pradesh
The recently tabled 16th Finance Commission (FC-16) report has brought to light significant financial strains in Himachal Pradesh, with a particular focus on the state's power sector and broader fiscal management. The document, presented in the Lok Sabha by Union Finance Minister Nirmala Sitharaman alongside the Union Budget for 2026-27, underscores urgent concerns that demand attention from policymakers.
Substantial Losses in State Public Sector Enterprises
According to the FC-16 findings, State Public Sector Enterprises (SPSEs) in Himachal Pradesh have incurred losses amounting to Rs 605 crore, with the power sector being a major contributor to this financial drain. This revelation points to inefficiencies and operational challenges within these state-run entities, which are crucial for the hill state's economic stability and public service delivery.
Rising Fiscal Deficit and Budgetary Imbalances
The report notes a sharp deterioration in Himachal Pradesh's fiscal indicators over recent years. Specifically, the fiscal deficit has escalated to 6.4 per cent in 2022-23 and 5.3 per cent in 2023-24, signaling a worrying trend in the state's financial health. The FC-16 attributes this to the state government's budgetary priorities, which allocate only a small portion towards capital expenditure while emphasizing recurrent expenses such as salaries, pensions, subsidies, and interest payments.
Critique of Fiscal Discipline and FRBM Amendments
Chaired by Dr. Arvind Panagariya, the Commission categorized Himachal Pradesh among states with less encouraging commitment to fiscal discipline. It highlighted amendments made by the state to its Fiscal Responsibility and Budget Management (FRBM) Act, 2003, as a key example. In 2023, Himachal Pradesh revised its fiscal deficit target to 6.0 per cent for 2022-23, effectively shifting goalposts and raising questions about adherence to fiscal norms. West Bengal was also mentioned in this context, indicating broader issues across certain states.
Electricity Subsidies: A Regressive Approach
A significant portion of the report critiques Himachal Pradesh's electricity subsidy policies. The FC-16 places the state among those that provide subsidies to large groups of consumers rather than targeting vulnerable sections. This broad-based approach is deemed regressive, as benefits disproportionately flow to higher-consumption households. States like Tamil Nadu, Punjab, Karnataka, and Rajasthan share similar patterns, whereas Kerala, Goa, Gujarat, and Odisha are praised for more targeted schemes that limit free power to specific groups, such as SC/ST households or low-consumption users, thereby improving equity and fiscal sustainability.
Recommendations and State Proposals
In response to these challenges, Himachal Pradesh has proposed several measures to the Finance Commission, including:
- Assigning a 2.5 per cent weight to dense forest cover in fiscal allocations.
- Allocating 5 per cent weight to initiatives under the Green Credit Programme.
- Another 5 per cent weight to forest cover as a proportion of total geographical area.
- Using a composite indicator based on socio-economic factors like health, education, rural electrification, and self-employment for better resource distribution.
Additionally, the FC-16 has allocated Rs 2,384 crores under the State Disaster Response Fund for 2026 to 2031, with yearly breakdowns as follows:
- 2026-27: Rs 431 crore
- 2027-28: Rs 453 crore
- 2028-29: Rs 476 crore
- 2029-30: Rs 500 crore
- 2030-31: Rs 524 crore
Broader Implications and Future Outlook
The FC-16 report serves as a critical assessment of Himachal Pradesh's fiscal trajectory, emphasizing the need for reforms in subsidy targeting, capital investment, and adherence to fiscal rules. While the Commission has been criticized for remaining silent on Revenue Deficit Grants for Himachal and other states, its observations highlight pressing issues that could impact the state's long-term economic resilience and social welfare outcomes. Moving forward, policymakers may need to balance developmental goals with fiscal prudence to ensure sustainable growth in the region.
