The Story Of Himachal's Financial Crisis: Reckless Spending, Delayed Salaries, Unfulfilled Promises

The politics of freebies has become a dominant theme in recent elections, frequently raising concerns about its impact on the fiscal stability of states.

While these incentives serve as a means to attract voters, their long-term consequences reveal serious financial challenges.

Himachal Pradesh, in particular, is already witnessing the fallout and other states like Punjab and Karnataka appear to be on a similar trajectory.

Facing increasing financial strain, the Congress-led state government decided to enforce ‘fiscal discipline’, through measures of rationalising existing subsidy schemes, adjusting salary disbursement schedules, and revoking pensions for many.

Recent reports show that the government had to delay salaries for its employees. For the first time in the state's history, nearly 2 lakh employees and 1.5 lakh pensioners did not receive their salaries and pensions on 1 September 2024, highlighting the state's financial troubles.

Those affected include employees across key sectors such as the Himachal Road Transport Corporation (HRTC), forest corporation, medical colleges, and the irrigation department.

An economic expert from Mandi, Himachal Pradesh tells Swarajya, “Only after 2022, we are discussing this. But this had been building up for years. Both Congress and BJP governments have continued subsidies and welfare schemes under public pressure, leading to the current situation.”

“The debt situation was always there, but different governments managed it differently. Now, with the previous burden, and present financial mismanagement, the state has reached the brink of crisis,” he adds.

The situation stems from years of rising expenditure on freebies, welfare schemes, as well as the rising salaries, pensions, and subsidies. As revenue sources remain limited; the state has become increasingly dependent on borrowings to sustain these commitments.

A major portion of the state's budget is consumed by fixed expenses. Of the total annual budget of nearly 67 per cent is allocated solely to salaries, pensions, and interest payments.

Adding to this financial strain were the numerous freebies promises that helped Congress come to power in 2022.

Since then, the situation has declined, with a revenue deficit of 2.6 per cent and a fiscal deficit of 5.9 per cent in 2023-24 — both exceeding targets. 

A revenue deficit indicates that the government must rely on borrowing to cover expenses that neither create assets nor reduce liabilities.

Promises Made In 2022

The Congress had promised to create 1 lakh jobs in its first year and 5 lakh jobs over five years, along with several welfare schemes, including Rs 1,500 per month for women (costing around Rs 800 crore annually), 300 units of free electricity per month, the restoration of the old pension scheme (OPS), and benefits for apple growers.

However, none of these promises have been fully implemented. Additionally, subsidies provided in previous terms have also been discontinued.

Chief Minister Sukhvinder Singh Sukhu refused to take responsibility for the state's financial crisis, instead blaming the previous BJP government for the situation.

He claims that BJP-led policies, such as providing free water and electricity, added an annual burden of Rs 1,080 crore to the state exchequer.

After hitting its lowest point, the state government introduced several measures, though many have been unpopular with the public.

• All ministers' salaries were withheld for two months as a symbolic move to emphasize the need for financial prudence.

The government had to also shut down several schools with zero enrolment and nearly 25 colleges.

“Over the years, successive governments opened a large number of educational institutions without proper infrastructure or planning. Under former CM Virbhadra Singh, 60 colleges were set up, and today, that number has grown to 200—many of which remain dysfunctional, as it is too many for 12 districts,” adds Dr. Singh.

Tracing State’s Fiscal History

“For the past 20 years, election announcements have only focused on subsidies and freebies. The issues of it are only being discussed now,” Dr. Sanjeet Singh, Dean and Professor of Economics at Central University of HP, Dharamsala, tells Swarajya.

According to a Mint report, after Himachal Pradesh was granted statehood in 1971, it received special category status, allowing it to rely heavily on central funds. Given its small population and limited resources, along with challenging geo-climatic conditions, economic activities remained restricted.

For two decades, central funding covered most of the state’s financial needs, while, no major attention was given to revenue generation.

This changed with the Ninth Finance Commission in 1987, which aimed to reduce states' revenue deficits and altered the funding model for special category states.

As a result, the state saw a sharp decline in central funds. Even after the shift, high expenditures continued through borrowings.

The Cost Of Freebies

“In 2005, pulse prices surged across the country as many farmers in Madhya Pradesh switched from pulses to wheat. This led to inflation in pulse prices nationwide,” Dr. Singh adds.

“However, in Himachal Pradesh, then-Congress Chief Minister Virbhadra Singh announced a Rs 100 crore subsidy to stabilise pulse prices. While market rates soared to Rs 200 per kg, pulses were sold through the PDS system at just Rs 20 per kg.”

“This was the beginning of people's dependence on freebies,” Dr. Singh adds, “with food available so cheaply, many stopped working. Since then, any party attempting to reduce or remove such subsidies has been voted out.”

Over time, welfare schemes became central to election campaigns, despite the increasing financial burden.

In 2017, the BJP came with 125 units of free power and later waived rural water bills. Ahead of the 2022 elections, it also revised government employees’ pay, benefiting nearly 15 per cent of the electorate.

Meanwhile, after Congress took over in 2022, its welfare schemes coincided with declining revenue, particularly from the Centre.

The state’s revenue deficit grant (RDG) fell by Rs 3,000 crore between the 14th and 15th Finance Commissions.

Its borrowing capacity shrank from Rs 14,500 crore to Rs 9,000 crore, as the Centre lowered the borrowing limit to 3.5 per cent of GDP from 5 per cent.

According to budget analysis by PRS India, despite receiving central grants to eliminate its revenue deficit, the state continues to struggle.

In 2021-22, it received Rs 10,249 crore for this purpose, but by FY 2025-26, this amount will drop to Rs 3,257 crore.

With most funds tied up in fixed expenditures, little is left for capital and developmental projects.

Unfulfilled Promises

The government has not only cut down on subsidies from the previous administration but also struggled to fulfil its own election promises.

A state government employee tells Swarajya, “The free electricity scheme has not been implemented, and even the previous subsidies are withdrawn.”

The promised Rs 1,500 financial aid for women remains largely on paper.

“Only a small group of 300-400 women, mostly under specific leaders of the ruling party, have received it, and their PR team continues to publicise that. Beyond that, nothing has materialised,” the employee adds.

Another government employee adds, “People have been silent so far, as it has been only a few months. Though, a group also agitated but faced court cases or threats to their jobs.”

However, discontent is growing, particularly among marginalised groups who really need these schemes.

“But there’s a limit to how long people will stay silent. The focus should be on increasing revenue and cutting unnecessary expenses, not on delaying salaries or withdrawing crucial support from those who need it most,”, he adds.

Experts see that beyond the visible economic impact reflected in budget cuts and policy rollbacks, the social repercussions will also start to surface soon if the situation is not improved — both in rural areas, where welfare beneficiaries are struggling, and in towns, where staff, teachers and other workers are being directly affected.