Assessing Fiscal Behaviour in Himachal Pradesh: An Empirical Analysis of Taxation, Debt and Gross State Domestic Product

Abstract

This paper explores the transformative journey of India’s Rising government spending in relation to revenue capacity has been linked to growing budget deficits.The paper examines Himachal Pradesh's budgetary dynamics from 2003-04 to 2024-25 utilizing major fiscal indicators and econometric approaches. The data indicate that revenue growth and economic expansion have been sustained, but rising expenditure pressures and expanding public debt pose challenges to fiscal sustainability. While the state displayed fiscal restraint in the mid-2010s, current trends point to increased fiscal stress, emphasizing the need for stronger tax mobilization, expenditure control, and smart debt management.Correlation analysis reveals that rising revenues and fiscal deficits play a significant role in driving fiscal stress, underlining the importance of aligning revenue generation with effective expenditure management. The unit root test results show that most fiscal variables follow long-term stochastic trends and are integrated to order one, although the fiscal deficit ratio and interest payments are more stable, making them ideal for short-run fiscal evaluation. Furthermore, Granger causality research indicates that public debt and economic growth have a considerable impact on fiscal deficits, with little evidence of reverse causation. The study emphasizes the importance of a coordinated fiscal policy focusing on income growth, spending control, and effective debt management in Himachal Pradesh to achieve long-term fiscal sustainability.