Fiscal cliff ahead: Withdrawal of grant threatens to derail development

Himachal Pradesh’s development trajectory faces a serious risk if the Central Government accepts the 16th Finance Commission’s recommendation to discontinue the annual Revenue Deficit Grant (RDG) of around Rs 10,000 crore every year that the hill state has long depended upon. The possible withdrawal of this crucial fiscal lifeline has triggered alarm within the state government, which fears it could cripple public finances and slow development across sectors.

While Himachal Pradesh is not alone, 17 states stand to lose RDG, the impact on this cash-strapped hill state is expected to be disproportionately severe. With limited avenues for resource generation due to its geography, ecological sensitivities and economic structure, Himachal has relied heavily on RDG to bridge the persistent gap between its revenue and expenditure.

To assess the fallout of the proposed discontinuation, the state government has convened a special Cabinet meeting here tomorrow. Sensing the gravity of the situation, an all-party meeting has also been called after the Cabinet deliberations to apprise political stakeholders of the implications. However, uncertainty looms over the participation of BJP legislators, with the party conveying that the meeting date was fixed without consulting the Leader of Opposition, who has prior engagements.

Chief Minister Sukhvinder Singh Sukhu is expected to present detailed facts and figures during the meetings, highlighting the drastic consequences of RDG withdrawal. The Chief Minister has already indicated that the loss of RDG could force the government into taking harsh decisions, including withdrawal of subsidies and imposition of new taxes, steps that would directly affect ordinary citizens.

In this critical backdrop, the government may move to enforce some recommendations of the Resource Mobilisation Committee headed by Deputy Chief Minister Mukesh Agnihotri, which submitted its report last year. These measures, though politically and socially sensitive, could be seen as unavoidable if RDG support ceases.

“Himachal is already reeling under the adverse impact of GST and low import duties. Discontinuation of RDG will further worsen our financial position, which is deeply unjust for a hill state with negligible means of resource generation,” the Chief Minister said. He emphasised that the burden of RDG withdrawal would not be limited to the government alone but would be felt by every citizen, particularly over the next 10 years.

The CM noted that through fiscal prudence and better management, the state was aiming to raise revenue from its own resources to Rs 50,000 crore. “RDG exists to bridge the revenue-expenditure gap. Himachal has never been a revenue-surplus state. Its discontinuation will hit essential services and development alike,” he said.

RDG is a constitutional transfer under Article 275, recommended by the Finance Commission to help states meet revenue deficits and reduce inter-state disparities. Himachal received Rs 10,249 crore in 2021-22, Rs 9,377 crore in 2022-23, Rs 8,058 crore in 2023-24 and Rs 6,258 crore each in 2024-25 and 2025-26 as tapering grants. Contrary to expectations of an increase during the 2026–31 period, the proposed cessation has come as a major shock to the state.