Burgeoning expenses on salary, pension cripple spending by states

On an average, salaries, pension and interest payouts alone make up 40% of a state's total expenditure, leaving little room for spending in other critical areas

The spurt in expenses on salaries, pension and interest cost is hurting the ability of states to put aside sufficient funds for socio-economic programmes and capital expenditure.

On an average, the three components -- salaries, pension and interest payouts make up 40 per cent of a state's total expenditure. A study by CARE Ratings reveals there are 12 states where the spend on these three components has surpassed 40.5 per cent of overall expenditure. This has left the states with a shrinking expense pool for other critical areas.

In Himachal Pradesh, the share of committed expenditure is the highest, at 61.9 per cent of the overall Budgeted spending. Kerala, with an outgo of Rs 1.27 trillion, has earmarked 52.3 per cent on the committed expenditure on salaries, pension and interest cost. Other states with committed expenses higher than the normal are Maharashtra (41.3 per cent), Tamil Nadu (45.4 per cent), Rajasthan (45.2 per cent), Assam (47.8 per cent), Uttarakhand (54.5 per cent), Tripura (52.2 per cent), Nagaland (57.7 per cent), Manipur (43.8 per cent), Mizoram (45 per cent) and Sikkim (46 per cent). All the other states with committed expenditure on the higher side have total expenditure below Rs one trillion.

All large states, save Tamil Nadu and Rajasthan, do not rank among states with the highest budgets on committed expenditure. The study by the rating agency establishes that the top 10 states on the basis of descending size of expenditure, have 36 per cent of their expenses set aside for salaries, pension and interest payouts on an average.

As states bank on higher borrowings to finance their fiscal deficits and implement recommendations by the Seventh Pay Commission, their finances are under strain.

“Each  state  has  its  own  developmental  priorities  and  hence  budget  management becomes  critical.  Within  the  budget,  the  control  of  expenditure  becomes  imperative as  it has  been  seen  that as 

the  size  of  state  budgets  have  increased  and  states  are walking on a tight rope of managing the fiscal balances”, the report by CARE Ratings noted.

The relatively smaller states tend to have a higher proportion being spent on salaries. Maharashtra and Rajasthan - two large states are exceptions with high shares of salaries in total expenditure. Gujarat (11.7 per cent), Bihar (13.0 per cent) and Uttar Pradesh (13.3 per cent) have the lowest expenditures incurred on salary as a percentage of total expenditure. Himachal Pradesh (35.3 per cent) is second to Nagaland in incurring expenditure of the nature of salaries as a percentage of total expenditure. 

On the interest cost, West Bengal (15.7 per cent) has the highest value followed by Haryana (13.2 per cent) and Tamil Nadu (12.8 per cent). The average value of the interest cost as a percentage of total expenditure is 8.2 per cent. Ten out of the 27 states have this ratio above the average value. 

There are 27 states that have entered the flagship Ujjwal DISCOM Assurance Yojana (UDAY) for financial revival of stressed electricity distribution companies with states taking over the debt of such companies. The bonds raised by these states during FY16 and FY17 have also pressurised their finances.