TIKENDER SINGH PANWAR
Revenues flow overwhelmingly to Central utilities. The resource is local. The land is local. The risks are local. The profits are not.
FOR nearly seven decades, the Indian Republic has recognised a foundational truth of federal governance: not all states are born with equal economic capacity, and some, especially mountain and border states, carry structural disadvantages. The revenue deficit grant (RDG) emerged from this understanding. It was an instrument meant to balance geography, history and national priorities. The 16th Finance Commission’s decision to withdraw the RDG from Himachal Pradesh marks a rupture in India’s federal compact — one that threatens to push the state towards fiscal subordination and political marginalisation.
Himachal Pradesh was never carved out on the assumption that it would be a revenue-surplus state. It was carved out because the Indian State believed that political integration, border security, ecological stewardship and social development in the Himalayas were national responsibilities. Since the time of the earliest finance commissions, revenue deficit support recognised that governing a mountainous, sparsely populated, fragile region costs more and yields less by conventional revenue logic.
The 16th Finance Commission’s approach dismantles this legacy. Over the next five years, Himachal is set to lose around Rs 50,000 crore. Last year, the state’s revenue receipts stood at roughly Rs 42,000 crore. Even a Rs 10,000-crore annual shortfall — the scale of RDG withdrawal — amounts to 25% of the state’s revenue base.
This will hit pensions, salaries, healthcare, education and basic service delivery. A state government cannot absorb a quarter of its revenue without severe social and political consequences. At this scale, fiscal autonomy collapses into fiscal survival. The question, therefore, is: Can a state continue to function as a state under such conditions?
Himachal Pradesh is a border state, supported by the Centre as a strategic necessity. The withdrawal of revenue support signals a dangerous shift — from shared responsibility to abandonment.
This move reflects a mindset of over-centralisation, where the Union consolidates fiscal power while states are reduced to implementation agencies. Federalism, in this vision, is no longer a partnership of equals but a hierarchy of dependence.
When states are stripped of predictable revenue flows, they are forced into debt, compliance and political acquiescence. One is compelled to ask whether this fiscal strangulation reflects a reimagination of states as administrative extensions of the Centre. Is Himachal being virtually nudged towards the status of a union territory?
This fiscal assault must be read alongside Himachal’s experience with extractive development. Hydropower is a glaring example. For decades, the state has borne the ecological, social and infrastructural costs of dam construction: displacement, destabilised mountains, altered river systems and irreversible ecological stress.
Yet the financial returns barely touch the state. The royalty — at around 12% of generated power, misleadingly termed “free power” or “distress cost” — is negligible. There is no equity participation for the state, except in a few cases. Revenues flow overwhelmingly to Central utilities and private corporations. The resource is local. The land is local. The risks are local. The profits are not.
This is extractive capitalism: the periphery supplies resources, the centre accumulates surplus and the state absorbs the damage. When revenue deficit support is simultaneously withdrawn, the cycle of extraction is completed.
The injustice deepens when one considers forest governance. Following forest nationalisation and regulatory tightening after the 1980s, states like Himachal were left with a vast green cover but no meaningful fiscal instruments to derive revenue from it. Forests in Himachal are ecological shields, contributing to climate stability, water security and biodiversity for the entire country. Yet the costs of protection, conservation, disaster management and opportunity loss are borne almost entirely by the state.
No economic activity, no sustainable extraction, no revenue innovation is permitted — rightly, in ecological terms — but with no compensatory fiscal mechanism. In this context, the revenue deficit grant is a legitimate constitutional compensation for providing national ecological services. To withdraw it is to penalise environmental responsibility.
Perhaps the most perverse feature of the 16th Finance Commission’s logic is its disregard for what Himachal has achieved despite constraints. The state has emerged second only to Kerala on key human development indicators. It was the result of decades of investment in education, healthcare, nutrition and social welfare. The very expenditures that built this success now appear to be treated as fiscal inefficiencies. Instead of rewarding social investment, the Finance Commission’s approach effectively punishes it.
Beyond numbers and balance sheets lies a deeper moral question. Himachal has given more than resources — it has given lives. Visit villages in Kangra, Hamirpur, Una and adjoining regions. Attend gram sabha meetings. In many villages, you will find women assembling in overwhelming numbers because generations of men have been lost — to wars, border conflicts and military deployments. Himachal has one of the highest per capita representations in the armed forces. Its people have guarded borders, served in hostile terrain and paid a disproportionate price for national security.
The fiscal hollowing is compounded by the steady erosion of the state’s legitimate claims over Bhakra-Beas revenues and land-based income linked to water flows. Water flows on land. Land is a state subject. Any serious federal arrangement would recognise land revenue as a legitimate income stream. The systematic denial of these rights leaves the state with responsibility but no resources — a model guaranteed to fail.
All this unfolds amid rising unemployment, youth anxiety and social stress. Fiscal contraction under such conditions is destabilising. When the Centre withdraws support without building alternative revenue pathways, it pushes the state towards alienation and political resentment. History teaches us that such alienation does not remain silent for long.
The question must be clearly asked: Does the Centre intend to reduce Himachal Pradesh to a fiscally dependent adjunct or will it honour the constitutional promise that held the Union together for 70 years? The present may choose to ignore this warning. The future will not.
Tikender Singh Panwar is the former deputy mayor of Shimla, and currently a member of the Kerala Urban Commission.
The article was first published in The Tribune as How the RDG cut pushes Himachal to the brink on February 13, 2026.
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
Read more at IMPRI:
Union Budget 2026–27: Reform Rhetoric, Unequal Outcomes
Union Budget 2026–27: Incremental Change Without Structural Transformation
Acknowledgment: This article was posted by R.TEJASWINI, a Research Intern at IMPRI.
