Shimla: Facing a widening gap between its revenues and expenditure, rising interest costs and a debt burden estimated at around ₹1.10 lakh crore, the Himachal Pradesh government has prepared a four-year medium-term debt management strategy aimed at reducing financial risks and bringing the state’s debt-to-GSDP ratio down to 40.64 per cent by 2029-30, from more than 43 per cent at present.
The strategy, covering 2026-27 to 2029-30, marks a shift from simply raising fresh loans to managing the existing debt portfolio more carefully. The government plans to reduce borrowing costs, extend the maturity of loans and avoid excessive dependence on short-term market borrowings.
Finance department has said the objective is not merely to borrow but to make the debt portfolio more sustainable and reduce repayment and refinancing risks.
The strategy assumes particular importance because Himachal’s fiscal problem is not just the size of its debt. The larger concern is the state’s ability to generate enough revenue surplus in the future to service debt without sacrificing essential expenditure and development spending.
Debt burden has to be viewed alongside revenue capacity
The state’s 2026-27 Budget projects a GSDP of ₹2.77 lakh crore, while expenditure excluding debt repayment is estimated at ₹50,088 crore. Receipts excluding borrowings are projected at only ₹40,389 crore, leaving the government dependent on net borrowings of around ₹11,965 crore. The budget also provides for repayment of ₹4,840 crore of debt.
More importantly, Himachal is still running a revenue deficit of ₹6,577 crore, equivalent to 2.4 per cent of GSDP, while the fiscal deficit is projected at ₹9,698 crore, or 3.5 per cent of GSDP.
This means that the state is not yet in a position where its regular revenues comfortably cover its regular expenditure. Until that changes, a substantial part of borrowing will continue to be used to bridge fiscal gaps rather than exclusively finance productive assets.
The figures from 2024-25 illustrate the pressure. Actual revenue receipts were ₹40,872 crore, against revenue expenditure of ₹47,677 crore, leaving a revenue deficit of ₹6,805 crore. The state also borrowed ₹26,622 crore during the year, while debt repayment amounted to ₹18,169 crore.
The interest bill is the hidden pressure
One of the most important aspects of Himachal’s debt problem is the annual interest burden.
CAG’s accounts show that the state paid around ₹6,261 crore in interest during 2024-25.
Interest payments alone therefore consume a substantial amount of money that could otherwise be available for roads, health, education, infrastructure and other development expenditure.
The state’s interest cost has nevertheless improved, falling from around 7.61 per cent in 2020-21 to 6.77 per cent in 2024-25, according to the government’s debt-management assessment cited in the strategy.
The proposed move towards longer-maturity borrowing could provide some breathing space. The average maturity of Himachal’s market debt increased from 6.96 years in March 2021 to 8.15 years in March 2025, with the government now targeting roughly 11 years by 2029-30.
Under the new approach, the state intends to largely avoid market loans with maturities of five years or less and instead look towards 15-, 20-year or longer instruments.
That does not eliminate the debt. It spreads repayment over a longer period, reducing the danger of large repayments falling due in a short window.
Can Himachal actually repay ₹1.10 lakh crore?
This is the central question facing the state.
The answer is that Himachal is unlikely to repay the entire debt from its existing annual revenues in the foreseeable future. That is not how government debt management normally works.
The more realistic objective is to ensure that:
economic growth + revenue growth + controlled expenditure > interest burden + fresh borrowing requirements
If the state can achieve this equation, its debt-to-GSDP ratio can gradually decline even while the absolute debt remains high.
For example, if the state’s economy grows faster than its debt stock, the debt ratio can fall. The government’s proposed reduction to 40.64 per cent by 2029-30 is therefore more about improving the relationship between debt and the size of the economy than paying off ₹1.10 lakh crore in cash.
Where can Himachal generate more money?
Himachal’s biggest challenge is its limited tax base. The state has a relatively small industrial base and a large expenditure burden arising from salaries, pensions and welfare commitments.
According to the 2026-27 Budget analysis, State GST is expected to be the largest component of the state’s own tax revenue, contributing around 43 per cent. The state has budgeted ₹6,655 crore from SGST, ₹3,174 crore from excise, ₹2,282 crore from Sales Tax/VAT, ₹1,069 crore from vehicle taxes and ₹852 crore from electricity taxes and duties.
This makes GST compliance, tourism-related economic activity, excise collections, property transactions and electricity-related revenues particularly important.
There is also considerable scope for improving revenue collection rather than simply increasing tax rates. PRS notes that as of March 2024, Himachal had ₹6,289 crore in revenue arrears, with about half pending for more than five years. Taxes on sales, trade and VAT accounted for a large share of these arrears.
Recovering even a meaningful portion of such arrears could provide additional fiscal space.
Hydropower remains Himachal’s biggest structural opportunity
Perhaps the most important long-term resource available to Himachal is its hydropower potential.
The government has already been attempting to increase its returns from hydropower projects. In February 2026, Chief Minister Sukhvinder Singh Sukhu said the state’s royalty share from the Karcham-Wangtoo hydropower project had increased from 12 per cent to 18 per cent, which he said would generate nearly ₹150 crore of additional annual income. He also said the state had generated ₹26,683 crore from its own resources during the previous three years.
This demonstrates why hydropower could become an important component of a long-term debt-reduction strategy.
The recently revived Kishau Multipurpose Project, a 422-MW project involving several states, also underlines the economic significance of Himachal’s water and energy resources. The project is expected to create compensation and other financial benefits for Himachal, although its direct fiscal impact will depend on the final arrangements.
The state could potentially increase revenue through better monetisation of water and power resources, royalties, transmission-related income and efficient management of its power-sector assets.
Tourism and land-based revenue offer another opportunity
Tourism is another area where Himachal has considerable untapped fiscal potential.
The state attracts millions of visitors, but the government does not necessarily capture a proportionate share of the economic activity generated by tourism. Greater formalisation of tourism businesses, better GST compliance, parking and transport charges, rationalised user fees and improved monetisation of government-owned properties could increase non-tax revenue.
However, aggressive taxation could also hurt tourism and local businesses. The objective would therefore need to be broader economic activity and better compliance rather than simply higher tax rates.
Property and land-related revenue could also improve. But the 2026-27 budget figures show a warning sign: land revenue was estimated at only ₹17 crore in the 2025-26 revised estimates against a budget target of ₹1,019 crore, a 98 per cent shortfall.
This suggests that better revenue administration may be as important as creating new taxes.
The Centre’s 50-year interest-free loans could reduce pressure
Another major component of the government’s strategy is the use of the Centre’s 50-year interest-free loans under the Special Assistance to States for Capital Investment scheme.
These loans are fundamentally different from conventional market borrowing because they reduce the immediate interest burden and can be directed towards capital projects.
For Himachal, using such funds for economically productive infrastructure could be beneficial because the state would avoid financing those projects entirely through relatively expensive market loans.
The key, however, will be ensuring that borrowed money is used for assets that generate economic returns, rather than projects that create additional recurring expenditure.
The bigger problem: committed expenditure
Himachal’s debt problem cannot be solved through borrowing management alone.
The state’s expenditure structure is a major constraint. Salaries, pensions and interest payments consume a large share of revenue, leaving relatively little flexibility for capital investment.
PRS had estimated committed expenditure at ₹33,463 crore in 2024-25, equivalent to 79 per cent of estimated revenue receipts, comprising ₹17,247 crore in salaries, ₹9,961 crore in pensions and ₹6,255 crore in interest payments.
Although fiscal conditions and budget assumptions have changed since then, the underlying structural problem remains: a large proportion of every rupee raised by the state is already committed before new development priorities are considered.
The financial strain became particularly visible in 2026 when the government temporarily ordered deferment of a portion of salaries of senior officials, citing prevailing financial circumstances and the need for prudent fiscal management.
Debt management can buy time—but growth must ultimately pay the bill
The proposed four-year roadmap can reduce the immediate risk of a debt repayment shock.
Longer maturity periods mean fewer large repayments coming due at the same time, while cheaper borrowing can reduce annual interest expenditure. Greater use of interest-free central capital loans can further reduce dependence on expensive market debt.
But these measures alone cannot resolve the structural problem.
Himachal has significant economic resources in hydropower, tourism, horticulture, water, forests and services, but these resources must generate substantially higher and more reliable returns for the government. At the same time, the state will have to improve tax collection, recover arrears, manage expenditure and ensure that new borrowing is increasingly directed towards productive assets.
A difficult but possible road ahead
Himachal’s financial position is undoubtedly stressed, but the situation should not be interpreted as meaning that the state is incapable of servicing its debt.
The state has substantial economic assets—hydropower, tourism, forests, water resources, horticulture and a growing services economy—that can support stronger future revenues. Its own tax collections are also capable of growing as economic activity expands.
The bigger issue is the speed at which these resources can be converted into recurring government revenue.
The 2026-27 budget itself projects GSDP growth of about 9 per cent at current prices, but also projects a revenue deficit of ₹6,577 crore. Unless revenue growth eventually outpaces committed expenditure, the government could remain caught in a cycle of borrowing to repay borrowing, even if the debt-to-GSDP ratio improves.
Therefore, the four-year debt-management strategy should be viewed as a risk-management plan rather than a debt-elimination plan.
If Himachal succeeds in lowering borrowing costs, extending maturities and, most importantly, generating sustained revenue growth, the ₹1.10 lakh crore debt burden can be serviced over the long term. But if revenue growth remains weak while salaries, pensions, interest and welfare commitments continue rising, merely shifting loans from five years to 15 or 20 years will only postpone the problem.
The real test of Himachal’s four-year debt strategy, therefore, will not be how much the state can borrow or how long it can defer repayment. It will be whether the state can expand its revenue base sufficiently to ensure that future economic growth—not fresh borrowing—becomes the principal source of its financial stability.
