Happy state — being hugged by grandad on vacation (4)
I believe the answer is:
glad
'happy' is the definition.
(I know that happy can be written as glad)
'state being hugged by grandad on vacation' is the wordplay.
'state' becomes 'la' (abbreviation for Louisiana).
'being hugged by' indicates putting letters inside (I've seen this in other clues).
'on vacation' suggests removing the centre (after the inside letters have vacated the word).
'grandad' with its centre taken out is 'gd'.
'la' placed into 'gd' is 'GLAD'.
(Other definitions for glad that I've seen before include "Little flowering plant" , "Informal flower < -girl" , "Happy, pleased" , "Not sorry" , "Feeling happy" .)