Keeping the wage bill in check: Neither Centre, nor states can relax

Not just the Centre, the states too must worry about the fiscal implications of rising salaries and pensions

North Block, headquarters of the Union finance ministry, has reportedly drawn attention to the growing burden of pay and pensions on the Union government’s finances. How serious is the problem? And are the states facing a bigger problem?

The Union Budget numbers show that the Centre’s total spend on salaries for its civilian staff and the armed forces will be about Rs 3.23 trillion in 2018-19, which is around 13 per cent of its total expenditure of Rs 24.42 trillion. To be fair, the Union government has remained vigilant against rising salaries expenditure. It will grow by only 6 per cent in the current year, compared to a rise of over 10 per cent in 2017-18. Naturally, the share of salaries in the total expenditure last year was higher at 14 per cent.

The problem for the Centre, however, arises on account of pensions. Total pensions for retired civilian staff and the armed forces at Rs 2.77 trillion account for about 11 per cent of the government’s total expenditure in the current year. Though this ratio has remained the same for the last two or three years, the total pensions burden on the central exchequer may soon become larger than that of salaries for the staff and the armed forces.

Pensions already are as large as 86 per cent of the Centre’s total salary bill and may soon surpass it. And pensions are likely to stay higher than salaries for at least two more decades. The national pension system was launched in 2004 that envisaged defined contribution by employees and employers to a corpus to provide for pensions of retiring persons. That ended a scheme, which used to defer the government’s pension liability in the future.

Thus, there is likely to be no respite from the growing pensions burden at least till 2038-39. Things may actually get worse if the government accepts the latest demand from sections of government employees to move back to the earlier system of the government providing for pensions. Already, this demand is endorsed by Arvind Kejriwal’s Aam Aadmi Party and if this becomes an election issue, the government’s finances could face a bigger threat.

The problem of salaries and pensions for the states is of a slightly different nature. A recent report, brought out by CARE Ratings, shows how salaries and pensions account for a good chunk of the state governments’ total expenditure. The states’ total spend under obligatory non-developmental heads, including salaries, pensions and interest payments, is now as high as 40 per cent of their total expenditure. But a large chunk of this is accounted for by salaries and pensions — at 32 per cent.

This is quite large and much higher than the Centre’s burden on account of salaries and pensions, which is estimated at 24 per cent. Remember that many states are yet to implement the recommendations of their Pay Commissions, in line with the Seventh Central Pay Commission, and their expenditure is not fully reflecting the additional burden on account of salaries and pensions as of now. Once that extra expenditure is added, the number may look more alarming.

The CARE Ratings report also shows how the problem of salaries could be far worse for some states. Almost all the north-eastern and hilly states have a salary bill that is well over 27 per cent of their expenditure, with Nagaland topping the chart at 38 per cent. Jammu & Kashmir is an exception at 18 per cent. West Bengal and Gujarat are at 11 per cent each, Bihar and Uttar Pradesh at 13 per cent, Telangana at 16 per cent and Madhya Pradesh is at 18 per cent of its total expenditure. Notably, the problematic states are Kerala with salaries accounting for 26 per cent of its total expenditure, Maharashtra and Rajasthan at 26 per cent each and Andhra Pradesh at 22 per cent. The states of Haryana, Odisha, Chhattisgarh and Tamil Nadu allocate between 18 and 20 per cent of their total expenditure on salaries.

The average burden of pensions on the states at 9 per cent of their total expenditure may look less problematic compared to the Centre’s share of 11 per cent. It is possible that the states’ hiring policy is such that a good portion of their salaried staff may be on contract and, therefore, not entitled to pensions. But that does not fully explain the two percentage points difference. The Centre also carries the pension burden of the armed forces, without which the share of civilian pensions is only 7 per cent of its total expenditure, lower than what the states incur at present.

The Centre should certainly worry about its salaries and pensions burden. But the states cannot relax either.