Why India should pay hill states a 'green bonus' for its forest -- based on its conservation results

Summary

Himachal Pradesh's demand for a 'green bonus' for keeping its forests protected has merit but it must fix its finances too, given much of its problems are of its own making. Here's how such a deal could be realized.

On 8 September, Himachal Pradesh chief minister Sukhvinder Singh Sukhu asked central finance minister Nirmala Sitharaman to let his state borrow more. A state's yearly borrowing is capped at 3% of its gross state domestic product (GSDP), which is the value of everything its economy produces in a year, and Sukhu wanted 4%. He needed the room, Mint reported, to meet the state's "committed liabilities" (bills it cannot avoid) and to fund services and development.

Every five years, a constitutional Finance Commission advises how the Centre shares tax money with states. States that still cannot meet day-to-day costs after that share may get a yearly top-up, or the revenue deficit grant.

Himachal Pradesh, one of 17 states to get it, was allotted ₹37,199 crore by the 15th Finance Commission for 2021-26, and the yearly amount shrank to ₹3,257 crore by 2025-26. The 16th Finance Commission has recommended no such grant to any state for 2026-31. Its report argues that the expectation of these grants "encourages states to be profligate," or spend carelessly.

Even with a bigger share of central taxes, Himachal Pradesh's 2026-27 budget expects about ₹4,200 crore less from New Delhi than last year's estimate, partly because the grant has gone. The state government has had to shrink its budget by ₹3,586 crore.

Where the money goes: The deeper problem is how the state spends. Of every ₹100 of revenue, from its own sources and the Centre, ₹41 goes on salaries. Pensions take ₹29 and interest on its debts another ₹18, according to PRS Legislative Research.

Across all states, these costs took 53% of revenue in 2023-24, so Himachal Pradesh's squeeze is unusually tight. Salaries pay teachers and doctors, so they are not waste. Himachal Pradesh's government has only ₹12 of every ₹100 left for everything else, from hospital medicines to road repairs, so the state plans to borrow ₹6,577 crore in 2026-27 for day-to-day bills.

Many pensioners who retired between 2016 and 2022 are still owed arrears, and in October, they were due only 15-30% of them, depending on the grade.

Why the hills deserve to be paid: Himachal Pradesh still has a fair complaint. The Comptroller and Auditor General records that 68% of the state is legally classified as forest, though actual forest cover is only about 28% of its area.

Forest law generally requires the Centre's permission before any of it becomes a road or a hydro project. Those forests shelter the rivers that fill the Bhakra and Pong dams, which water farms and light homes from Punjab to Rajasthan. In July 2025, the Supreme Court warned that, if things carried on as they did, "the entire state of Himachal Pradesh may vanish in thin air from the map of the country."

The 16th Commission gave forests a 10% weight in its tax-sharing formula, and this time it counted thinner forests and recent gains too. Himachal Pradesh's share still rose only from 0.83% to 0.91%, less than one rupee of every ₹100 the Centre passes to states. Sukhu calls Himachal Pradesh "the lung of north India" and wants a green bonus, a payment for keeping its forests standing.

Mistakes made at home: Much of the hole, though, is of Himachal Pradesh's own making, and both the main political parties dug it despite five years of warning that the grant would shrink.

In April 2022, months before an assembly elections, the Bharatiya Janata Party (BJP) government of Jai Ram Thakur promised zero electricity bills to homes using up to 125 units. In January 2023, the new Congress government approved bringing back the old pension scheme for over 1.36 lakh employees and pensioners.

The old scheme pays pensions straight from the budget, while the National Pension System builds a fund from contributions during a working life. Reserve Bank of India economists estimated in 2023 that the old scheme could, over time, cost states up to 4.5 times as much.

The 16th Commission found that Himachal Pradesh's power subsidy more than tripled between 2018-19 and 2024-25 to ₹1,936 crore. A study found that among India's best-off fifth of households by spending, nearly 70% of those in Himachal Pradesh got free power, against about 3% in Uttarakhand.

The Sukhu government withdrew the subsidy for income-tax payers in 2024, and this April for monthly use between 125 and 300 units.

A deal with conditions: New Delhi should pay a green bonus based on results. The Forest Survey of India checks forest cover every two years, so the Centre could pay a set amount for every hectare of forest Himachal Pradesh maintains or adds, and more for dense forests above the big dams. It could also allow some extra borrowing, as long as the money goes to building roads and drains that can withstand heavy rains. This benefit could be extended to other hill states.

In return, Shimla should have actuaries, the experts who calculate future payouts, work out what Himachal Pradesh's pension promises will cost. It should publish that figure and pay into a pension fund every year, as a Finance Commission study has suggested. It should limit free electricity to poor families, as the April order began to do, and give the assembly a dated plan to stop borrowing for daily expenses.

The next Union budget and Himachal Pradesh's budget, both due early next year, will be the last two before the state votes in late 2027, and should carry the terms of such a deal.

The author is an Indian Council of Social Science Research fellow at G. B. Pant Social Science Institute.