Himachal’s financial struggle in a centralised system

Tikender S Panwar (Ex-Dy Mayor, Shimla) and Raja Awasthi (Official, Govt of Himachal Pradesh)

OVER the past week, BJP president and Union Health Minister JP Nadda has made claims regarding the fiscal crisis in Himachal Pradesh. Nadda has argued that the state government, led by Chief Minister Sukhvinder Singh Sukhu, is financially dependent on the Central government. He has claimed that Rs 500 crore was being provided as a fiscal deficit grant, with an additional Rs 800 crore given monthly to keep the state financially afloat.

However, these statements are not merely a reflection of the fiscal concerns but also a political attack on the Congress-led Himachal government, raising questions about the state's fiscal management. Nadda's comments can be seen as part of a broader trend of undermining fiscal federalism in India, particularly targeting smaller states like Himachal Pradesh.

But do the smaller Himalayan states truly depend on the Centre for survival? And why has fiscal centralisation intensified in recent years?

Himachal Pradesh ranks just below Kerala in terms of human development indices, thanks to successive governments which have invested heavily in education and social welfare. By the mid-1980s, the state had achieved full electrification despite its low population density and challenging terrain. Human resource development has been a significant driver of growth even though the state has remained industrially underdeveloped.

Himachal Pradesh also contributes significantly to national resources, particularly in water and electricity generation, thanks to its large reservoirs and hydroelectric power stations. However, this has come at the cost of environmental degradation in the state. While the state's expenditure on social welfare remains high, it plays a vital role in national infrastructure.

The financial landscape of India over the last decade has increasingly shifted towards centralisation, weakening the fiscal autonomy of states.

Contrary to Nadda's assertions, the Centre's financial assistance is not an act of mercy but rather a constitutionally mandated part of India's federal structure. Article 270 of the Constitution outlines the distribution of taxes collected by the Union between the Centre and the states, based on the Finance Commission's recommendations. These taxes include corporation tax, personal income tax and the Central GST.

However, the BJP leader’s claim ignores the larger issue of cess and surcharge, which are collected by the Centre but not shared with the states. In 2024-25, cesses and surcharges are estimated to constitute 23 per cent of the Central government's gross tax receipts, depriving the states of their share. The total tax revenue for 2022-23, 2023-24 (revised estimates) and 2024-25 (budget estimates) are projected to be Rs 30.5 lakh crore, Rs 34.4 lakh crore, and Rs 38.8 lakh crore, respectively. Of this, the states' share will be only Rs 9.5 lakh crore, Rs 11.0 lakh crore, and Rs 12.2 lakh crore. It is significantly lower than the 41 per cent share recommended by the 15th Finance Commission.

Initially meant for specific, temporary purposes, cesses and surcharges have now become permanent fixtures in India's tax system. The share of cesses and surcharges in the Centre's gross tax revenue increased from 10.4 per cent in 2011-12 to 20.1 per cent in 2020-21. This shift has eroded the share of taxes devolved to states, significantly affecting their revenue.

Even though various finance commissions have repeatedly advised that cesses and surcharges be levied sparingly, the Central government has increasingly relied on these measures. States have little-to-no control over these revenues, which are often used for Centrally-sponsored schemes. This has undermined the spirit of fiscal federalism, leaving states with reduced fiscal independence.

For example, the GST compensation cess, intended to cover shortfalls in tax collection after the GST's introduction, is being used primarily to repay loans taken for compensation purposes. The Centre's reliance on these levies has not only weakened the financial position of the states but also raised concerns about the transparency and accountability of how these funds are used.

Does the given fiscal architecture mean that the larger game plan is to destabilise the Opposition-ruled state governments in the country?

JP Nadda, hailing from Himachal Pradesh and having served as a Cabinet minister in the state, should recognise the unique fiscal challenges faced by the mountain states. Himachal, which shares an international border, has particular fiscal needs and requires special attention from the Centre. After achieving statehood, Himachal enjoyed a strong partnership with the Central government, which facilitated its remarkable developmental progress. This collaboration was built on mutual trust and shared responsibility for development, not on condescension or political ridicule.

If Nadda truly wants to help HP, he should advocate for the state's rightful demands rather than demean it for political purposes. HP’s fiscal concerns are longstanding and deserve attention. They include issues related to the Bhakra Beas Management Board (BBMB), the Punjab Reorganisation Act and the water cess dispute — all of which have significant financial implications for the state.

The Supreme Court has upheld Himachal's claims in these matters. The Central government should work to resolve them fairly.

Himachal Pradesh is not merely surviving on the Centre's largesse; it is an integral part of India's development, contributing to national resources while balancing its own fiscal needs. The state has made considerable progress in human development, largely through its investments in education, health and social welfare. However, the increasing centraliaation of fiscal powers, particularly through cesses and surcharges, has limited the state's financial independence.

For fiscal federalism to thrive, the Centre must recognise the importance of states like Himachal and work collaboratively to address their concerns. Restoring the balance between the Centre and the states that ensures a fair distribution of resources is essential for the long-term development of India's federal system.

Rather than perpetuating political attacks, the Centre should focus on promoting the rightful fiscal interests of Himachal Pradesh and fostering a more cooperative approach to governance.