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Will continue OPS, other welfare schemes despite RDG withdrawal: Sukhu, seeks PM’s appointment

February 11, 2026 8 min read Polity & Governance Economics GS2 (Polity & Governance Federalism) GS3 (Economics)
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What Happened

  • Himachal Pradesh Chief Minister Sukhvinder Singh Sukhu declared that the state will continue the Old Pension Scheme (OPS) and all welfare schemes despite the withdrawal of the Revenue Deficit Grant (RDG) by the 16th Finance Commission.
  • The 16th Finance Commission, chaired by Dr Arvind Panagariya, recommended discontinuing RDGs for all 17 recipient states for the 2026-31 period. This was accepted by the Centre in the Union Budget 2026-27 tabled on 1 February 2026.
  • Himachal Pradesh received approximately Rs 37,199 crore in RDG from the 15th Finance Commission (2021-26), and the grant accounted for 12.71% of the state's total budget -- the second-highest dependency after Nagaland (17.21%).
  • CM Sukhu sought an appointment with Prime Minister Modi to press the state's case, called the RDG discontinuation a "black day" for the state, and indicated the government would explore legal options. The state Finance Department estimated a resource gap of approximately Rs 6,000 crore in 2026-27.
  • The CM also rejected any move to replace OPS with the Unified Pension Scheme (UPS), asserting that social security of government employees would not be compromised.

Static Topic Bridges

Revenue Deficit Grants Under the Finance Commission

Revenue Deficit Grants (RDGs), also known as Post-Devolution Revenue Deficit (PDRD) Grants, are provided by the Centre to states under Article 275(1) of the Constitution. The Finance Commission recommends these grants to cover the gap between a state's assessed revenue expenditure and its assessed revenue receipts (including the state's share in central taxes after devolution). A state has a "revenue deficit" when its total revenue expenditure exceeds its total revenue receipts, and RDGs are meant to bridge this gap so that states can meet their committed expenditure obligations (salaries, pensions, interest payments, social sector spending).

  • Constitutional Basis: Article 275(1) empowers Parliament, on the recommendation of the Finance Commission, to provide grants-in-aid to states that are "in need of assistance"
  • 15th Finance Commission (2021-26): Recommended RDGs for 17 states totalling Rs 2,94,514 crore over five years. Himachal Pradesh received Rs 37,199 crore
  • 16th Finance Commission (2026-31): Recommended complete discontinuation of RDGs for all states, a significant departure from past practice
  • Rationale for discontinuation: The 16th FC argued that the increase in tax devolution and other grants should be sufficient, and RDGs create moral hazard by discouraging states from expanding their own revenue base
  • States most affected: Himachal Pradesh (12.71% of budget), Nagaland (17.21%), Kerala, Manipur, Meghalaya, Mizoram, Tripura, and other north-eastern and hill states
  • The 14th Finance Commission (2015-20) had also recommended RDGs for states with post-devolution revenue deficits

Connection to this news: The discontinuation of RDGs is the proximate cause of Himachal Pradesh's fiscal crisis. CM Sukhu's argument that RDGs are a constitutional "right" under Article 275 (rather than temporary support) directly challenges the 16th FC's rationale for discontinuation.

Article 280 -- Finance Commission of India

Article 280 of the Constitution mandates the President to constitute a Finance Commission within two years of the Constitution's commencement and thereafter at the expiration of every fifth year (or earlier). The Commission consists of a Chairman and four other members appointed by the President. Parliament determines the qualifications for membership under the Finance Commission (Miscellaneous Provisions) Act, 1951. The Commission's primary duties under Article 280(3) are: (a) distribution of net proceeds of taxes between the Union and States (vertical devolution) and allocation among States (horizontal devolution); (b) principles governing grants-in-aid under Article 275; (c) measures to augment the Consolidated Fund of a State to supplement local body resources (added by the 73rd and 74th Amendments); and (d) any other matter referred by the President in the interests of sound finance.

  • 16th Finance Commission: Constituted 31 December 2023; Chairman -- Dr Arvind Panagariya (former Vice-Chairman, NITI Aayog); report tabled 1 February 2026 for the period 2026-27 to 2030-31
  • 15th Finance Commission: Chairman -- N.K. Singh; report for 2021-26; recommended 41% vertical devolution
  • Finance Commission recommendations are advisory, not binding on the government. However, the Centre has historically accepted most recommendations
  • Distinction: Finance Commission (Art 280) deals with tax devolution; GST Council (Art 279A) deals with GST rates and implementation; Inter-State Council (Art 263) deals with Centre-State policy coordination
  • The Chairman must be a person with experience in public affairs; members are selected from persons who are/were/are qualified to be High Court judges, or have special knowledge of government finance and accounts

Connection to this news: CM Sukhu's decision to seek the PM's appointment and explore legal options highlights the tension between the Finance Commission's advisory role and the practical dependence of states on its recommendations. Since the Centre has accepted the 16th FC's recommendation to discontinue RDGs, Himachal's recourse is political (lobbying the PM) or legal (challenging the constitutional basis).

Old Pension Scheme (OPS) vs National Pension System (NPS) vs Unified Pension Scheme (UPS)

Three pension frameworks currently operate in India for government employees. The Old Pension Scheme (OPS, pre-2004) was a defined-benefit scheme where retirees received 50% of last drawn basic salary as pension, fully funded by the government with no employee contribution. The National Pension System (NPS), introduced on 1 January 2004 for new central government recruits, is a defined-contribution scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA, established under the PFRDA Act, 2013). The Unified Pension Scheme (UPS), announced on 24 August 2024 and effective from 1 April 2025, attempts to combine elements of both -- guaranteed pension with contributory structure.

  • OPS: 50% of last drawn basic salary + DA; fully government-funded; no employee contribution; DA revision twice a year; family pension on death; fiscally unsustainable as liability grows with longevity and DA revisions
  • NPS: Employee contributes 10% of basic pay + DA; government contributes 14%; market-linked returns; 60% of corpus withdrawable at retirement (tax-free), 40% mandatorily used for annuity purchase; pension amount not guaranteed
  • UPS (effective 1 April 2025): Five pillars -- (1) Assured Pension: 50% of average basic salary of last 12 months (for 25+ years of service); (2) Assured Family Pension: 60% of member's pension; (3) Assured Minimum Pension: Rs 10,000/month (for 10+ years of service); (4) Inflation indexation linked to AICPI-IW (All India Consumer Price Index for Industrial Workers); (5) Lump sum at superannuation in addition to gratuity. Employee contributes 10%, government contributes 18.5%
  • State-level OPS restoration: Several states (Rajasthan, Chhattisgarh, Jharkhand, Punjab, Himachal Pradesh) restored OPS between 2022-2024 for state government employees, rejecting NPS
  • Centre's additional borrowing condition: The Centre blocked Rs 1,800 crore in additional borrowing for Himachal Pradesh, partially linked to the state's decision to continue OPS instead of migrating to UPS/NPS

Connection to this news: CM Sukhu's categorical assertion that OPS will continue despite the RDG withdrawal creates a compounding fiscal challenge -- the state loses Rs 6,000 crore annually in RDG while continuing the more expensive OPS (which requires no employee contribution and full government funding). The Centre's position implicitly links fiscal support to pension reform.

Fiscal Federalism and Centre-State Financial Relations

India's fiscal federalism framework is built on three pillars: tax devolution (Article 270, recommended by the Finance Commission), grants-in-aid (Article 275, recommended by the Finance Commission), and Centrally Sponsored Schemes (CSS, which carry conditions). The vertical fiscal imbalance (states collect about 37% of total revenue but bear about 62% of total expenditure) makes states dependent on central transfers. Special category states -- a classification first introduced in 1969 by the 5th Finance Commission for states with difficult terrain, low population density, strategic border locations, and economic backwardness -- receive additional financial support.

  • Himachal Pradesh: Classified as a Special Category State. The state's own revenue is approximately Rs 18,000 crore while committed expenditure (salaries, pensions, interest payments, loan repayment, subsidies, social security pensions) is approximately Rs 48,000 crore
  • Vertical devolution: 16th FC retained the states' share at 41% of the divisible pool (same as 15th FC). Several states had demanded 50%
  • FRBM Act, 2003: Fiscal Responsibility and Budget Management Act mandates fiscal deficit targets (originally 3% of GDP for Centre). States have their own FRBM laws. Himachal's debt-to-GSDP ratio is among the highest in the country
  • Article 293(3): States that have outstanding Central loans cannot borrow without the consent of the Government of India. This gives the Centre leverage over fiscally stressed states
  • 14th FC (2015-20): Increased vertical devolution from 32% to 42%, a landmark increase. The 15th FC reduced it marginally to 41% (after J&K reorganization), retained by the 16th FC

Connection to this news: Himachal Pradesh's fiscal crisis exemplifies the structural tension in Indian fiscal federalism -- special category states with high committed expenditure and limited revenue-generating capacity are disproportionately affected when central transfers are reduced. The state's own revenue covers only about 37.5% of its committed expenditure, making it acutely dependent on Finance Commission grants and devolution.

Key Facts & Data

  • 16th Finance Commission: Chaired by Dr Arvind Panagariya; constituted 31 December 2023; report tabled 1 February 2026; covers 2026-27 to 2030-31
  • Vertical devolution: 41% of divisible pool to states (unchanged from 15th FC)
  • RDG discontinued for all 17 recipient states under 16th FC
  • Himachal Pradesh RDG under 15th FC: Rs 37,199 crore (five years); 12.71% of state budget
  • Estimated resource gap for HP in 2026-27: approximately Rs 6,000 crore
  • HP own revenue: approximately Rs 18,000 crore; committed expenditure: approximately Rs 48,000 crore
  • OPS: 50% of last drawn salary, no employee contribution, fully government-funded
  • NPS: Employee 10% + Government 14%, market-linked, no guaranteed pension
  • UPS (effective 1 April 2025): Employee 10% + Government 18.5%, guaranteed 50% of average of last 12 months' basic pay (25+ years service), minimum Rs 10,000/month (10+ years)
  • Centre blocked Rs 1,800 crore additional borrowing for HP linked to OPS continuation