Economy

Covid-19: Salary and pension load may derail budget in some States

Vinson Kurian Thiruvananthapuram | Updated on March 29, 2020 Published on March 29, 2020

Representative image   -  Getty Images/iStockphoto

Government employees must share pain of private sector

The lockdown due to Covid-19 would mean that States with a high budgeted share of committed expenditures (salary, pension and interest payments) are at a higher fiscal risk than those with a low share.

States with low share of committed expenditure will be in a better position to tide over the fiscal crisis, says Jose Sebastian, public finance expert and formerly faculty at the Gulati Institute for Finance and Taxation, Thiruvananthapuram.

Irrespective of the revenue situation, committed expenditures are there to be met. Fiscal risk from the revenue side gets considerably mitigated if the expenditure structure is flexible, Sebastian told BusinessLine. This will obviate the need to divert borrowings to finance these expenditures, and States will be in a better position to set apart resources for agricultural and industrial sectors.

High committed expenditures

On the other hand, States with high committed expenditures will have to use the lion’s share of the borrowed funds to meet the committed expenditures, leaving their productive sectors to languish. This, Sebastian said, calls for a rethinking on the very concept of committed expenditures.

The burden of the coronavirus pandemic has to be shared more or less equally by all citizens. Businesses have declared a salary cut in an attempt to cope with the slowdown. “Is it not incumbent on the government to support businesses that create employment and income for the ordinary people, and public resources?" wonders Sebastian. It is high time the ‘untouchability’ attached to salary and perks of government employees makes way for a level playing field, he feels.

Direct taxes vs indirect taxes

Giving a breakdown, Sebastian said that indirect taxes such as goods and services tax (GST), state excise and sales tax account for nearly 70 per cent of the own revenue of States. The lockdown has brought production and consumption to rock bottom and this is going to impact the revenues from indirect taxes.

Direct taxes are comparably less vulnerable to the Covid-19 disruption but they account for less than 15 per cent of own revenue. Another 15 per cent comes from non-tax revenue sources. Dividends and profits from public sector enterprises, user charges on services in social and economic sectors, and lottery are the major sources of non-tax revenue. The revenue from these sources, except lottery, is least prone to the effect of Covid-19.

Kerala’s unique situation

States with a wider base of direct, indirect and non-tax sources are more resilient than States that have put all their eggs in one basket. A typical example is Kerala which, in 2016-17, mobilised 58.78 per cent of own revenue from four sources — liquor, lottery, petroleum products and motor vehicles. With the lockdown, the state-owned Beverages Corporation dealing in wholesale and retail marketing of liquor has closed its outlets as well as private bars. Sale of petroleum products too has drastically fallen, while that of lottery and motor vehicles has all but dried up. There may not be many States that find themselves in Kerala’s situation, Sebastian said.

Share of committed expenditure in revenue expenditure of major states-2017-18

State

Revenue

expenditure (Rs Cr)

Committed

expenditure (Rs Cr)

Committed expenditure as a % of revenue expenditure

Andhra Pradesh

1,21,214

62,916

52

Assam

55,481

37,560

68

Bihar

1,02,624

41,794

41

Chhattisgarh

56,230

20,206

36

Gujarat

1,18,060

61,119

52

Haryana

73,257

37,999

52

Jharkhand

50,950

21,365

42

Karnataka

1,42,482

48,460

34

Kerala

99,948

67,407

67

Madhya Pradesh

1,30,264

46,000

35

Maharashtra

2,41,571

1,27,390

53

Odisha

71,837

36,035

50

Punjab

62,465

48,753

78

Rajasthan

1,45,842

71,396

49

Tamil Nadu

1,67,874

93,352

56

Telangana

85,365

46,580

55

Uttarakhand

29,083

20,808

72

Uttar Pradesh

2,66,224

1,12,593

42

West Bengal

1,41,077

80,465

57

(Source: Reserve Bank of India)

Published on March 29, 2020

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