The Union Cabinet approved the implementation of Seventh Pay Commission recommendations yesterday.  The Commission was tasked with reviewing and proposing changes to the pay, pension and efficiency of government employees. These recommendations will apply to 33 lakh central government employees, in addition to 14 lakh armed forces personnel and 52 lakh pensioners.  This will take effect from January 1, 2016. Number of Employees Pensioners                 Pay, Allowances and Pension of central government employees In relation to an employee, the Commission proposed to increase (i) the minimum salary to Rs 18,000 per month, and (ii) the maximum salary to Rs 2,50,000 per month. It also recommended moving away from the existing system of pay bands and grade pay, which is used to determine an employee’s salary.  Instead, it proposed a new pay matrix which will take into account the hierarchy of employees, and their pay progression during the course of employment.  The Commission also suggested that this matrix should be reviewed periodically, with a frequency of less than 10 years. The Pay Commission also suggested a linkage between performance and remuneration of an employee.  For this, it proposed the introduction of performance related pay which will be based on an annual appraisal of the employee.  In addition, it recommended that annual increments of an employee should be withheld, if he is unable to meet the benchmark required for regular promotion or career progression. The Commission also sought to abolish or merge some of the allowances that may be given to employees by various government departments.  It suggested that, of the 196 allowances that exist, 52 should be abolished and 36 should either be merged under existing heads, or be included under proposed allowances.  Some of these allowances involved payment of a meagre amount of close to Rs 100 per month. In addition, the rates of House Rent Allowance (HRA) were revised.  The Commission proposed a methodology to increase the HRA rates every time the Dearness Allowance given to employees increased to 50% or 100%.  Dearness Allowance is given to employees in lieu of increases in the cost of living, on account of inflation. The Commission had also proposed a new methodology for computing pension for pensioners who retired before January 1, 2016.  This is aimed at bringing parity between past and current pensioners.  As part of the new methodology, two options for calculation of pension have been prescribed, and the pensioner may opt for either one. Financial Impact on the government Table 7CPCThe implementation of the Seventh Pay Commission recommendations is expected to cost the government Rs 1,02,100 crore.  Of this amount, 72% will be borne by the central government, and 28% by the railways. As a result, the overall expenditure is expected to increase by 23.6%, with a 16% increase in expenses on pay, 63% in allowances and 24% in pension. Addressing the issue of vacancy VacancyAs of 2014, the central government had a job vacancy of 18.5%.[i]  These vacancies may need to be filled or abolished, if required, to reduce redundancy.[ii] It may be noted that the Second Administrative Reforms Commission had observed that reducing the number of government employees is necessary for modern and professional governance.  Further, it had expressed concern that the increasing expenditure on salaries of government employees may be at the cost of investment in priority areas such as infrastructure development and poverty alleviation.[iii] Inducting specialised personnel in the government The Second Administrative Reforms Commission had also observed that some senior positions in the central government require specific skill sets (including technical and administrative know-how).[iii] One way of developing these skill-sets is to recruit personnel directly into these departments so that they can over a period of time develop the required skills.  For example, personnel from the Central Engineering Service (Roads) may aspire and be qualified to hold senior positions in the Ministry of Road, Transport and Highways or a body like the National Highways Authority of India. However, another view is that special skill-sets may be inducted in the government through lateral entry of experts from outside government.  This will allow for widening of the pool of candidates and greater competition for these positions.[iii] The Second Administrative Reforms Commission had also recommended that senior positions in the government should be open to all services. The last Pay Commission’s recommendations, in 2008, led to an increased demand in the automobile, consumer products and real estate related sectors.  With the Seventh Pay Commission’s recommendations expected to take effect from January 1, 2016, their impact on the economy and the consumer market will become known in due course of time.     [i] Report of the Seventh Central Pay Commission, Ministry of Finance, 2015 http://finmin.nic.in/7cpc/7cpc_report_eng.pdf. [ii] “Union govt has 729,000 vacancies: report”, Live Mint, November 30, 2015, http://www.livemint.com/Home-Page/X6U6xFe5oR2pW4simMmAhK/Union-govt-has-729000-vacancies-report.html. [iii] 10th and 13th Reports of the Second Administrative Reforms Commission, 2008 and 2009.  

Early this week, the Comptroller and Auditor General (CAG) of India tabled a report on the finances of Uttar Pradesh for the financial year 2020-21.  A few days prior to that, on May 26, the budget for Uttar Pradesh for 2022-23 was presented, along with which the final audited expenditure and receipt figures for the year 2020-21 were released.  The year 2020-21 presented a two-fold challenge for states – loss in revenue due to impact of COVID-19 pandemic and lockdown, and the need for increased expenditure to support affected persons and economic recovery.  CAG noted that Uttar Pradesh’s GSDP grew by 1.05% in 2020-21 as compared to a growth of 6.5% in 2019-20.  The state reported a revenue deficit of Rs 2,367 crore in 2020-21 after reporting revenue surplus for 14 successive years since 2006-07.  Revenue deficit is the excess of revenue expenditure over revenue receipts.  This blog looks at the key trends in the finances of Uttar Pradesh in 2020-21 and certain observations by CAG on fiscal management by the state.

Spending and Deficits in 2020-21

Underspending:  In 2020-21, total spending by the state was 26% less than the budget estimate presented in February 2020.  In sectors such as water supply and sanitation, the actual expenditure was 60% less than the amount budgeted, while in agriculture and allied activities only 53% of the budgeted amount was spent.  CAG observed that in 251 schemes across 57 departments, the state government did not incur any expenditure in 2020-21.  These schemes had a budget provision of at least one crore rupees, and had cumulative allocation of Rs 50,617 crore.  These included schemes such as Pipe Drinking Water Scheme in Bundelkhand/Vindhya and apportionment of pension liabilities.  Moreover, the overall savings due to non-utilisation of funds in 2020-21 was 27.28% of total budget provisions.  CAG observed that the budgetary provisions increased between 2016 and 2021.  However, the utilisation of budget provisions reduced between 2018-19 and 2020-21.

Pattern of spending: CAG observed that in case of 12 departments, more than 50% of the expenditure was incurred in March 2021, the last month of the financial year.  In the civil aviation department, 89% of the total expenditure was incurred in March while this figure was 62% for the social welfare department (welfare of handicapped and backward classes).  CAG noted that maintaining a steady pace of expenditure is a sound practice under public financial management.  However, the Uttar Pradesh Budget Manual has no specific instructions for preventing such bunching of expenditure.  The CAG recommended that the state government can consider issuing guidelines to control the rush of expenditure towards the closing months of the financial year.

Management of deficit and debt: As a measure to mitigate the impact of COVID-19, an Ordinance was promulgated in June 2020 to raise the fiscal deficit limit from 3% of GSDP to 5% of GSDP for the year 2020-21.   Fiscal deficit represents the gap between expenditure and receipts in a year, and this gap is filled with borrowings.   The Uttar Pradesh Fiscal Responsibility and Budget Management Act, 2004 (FRBM Act) passed by Uttar Pradesh Assembly specifies the upper limit for debt and deficits.  The Ordinance thus permitted the state government to borrow more to sustain its budget expenditure.  The fiscal deficit of the state in 2020-21 was 3.20% of GSDP, well below the revised limit. At the same time, the state’s outstanding debt to GSDP in 2020-21 was 32.77% of GSDP, above the target of 32% of GSDP set under the FRBM Act.  Outstanding debt represents accumulation of debt over the years.  

Table 1: Spending by Uttar Pradesh in 2020-21 as compared to Budget Estimates (in Rs crore)

Particular

2020-21 BE

2020-21 Actuals

% change from BE to Actuals

Net Receipts (1+2)

4,24,767

2,97,311

-30%

1. Revenue Receipts (a+b+c+d)

4,22,567

2,96,176

-30%

a. Own Tax Revenue

1,58,413

1,19,897

-24%

b. Own Non-Tax Revenue

31,179

11,846

-62%

c. Share in central taxes

1,52,863

1,06,687

-30%

d. Grants-in-aid from the Centre

80,112

57,746

-28%

Of which GST compensation grants

7,608

9,381

23%

2. Non-Debt Capital Receipts

2,200

1,135

-48%

3. Borrowings

75,791

86,859

15%

Of which GST compensation loan

-

6,007

-

Net Expenditure (4+5+6)

4,77,963

3,51,933

-26%

4. Revenue Expenditure

3,95,117

2,98,543

-24%

5. Capital Outlay

81,209

52,237

-36%

6. Loans and Advances

1,637

1,153

-30%

7. Debt Repayment

34,897

26,777

-23%

Revenue Balance

27,451

-2,367

-109%

Revenue Balance (as % of GSDP)

1.53%

-0.14%

 

Fiscal Deficit

53,195

54,622

3%

Fiscal Deficit (as % of GSDP)

2.97%

3.20%

 

Note: A negative revenue balance indicates a deficit.  The actual fiscal deficit reported by Uttar Pradesh for 2020-21 in 2022-23 budget was 2.8% of GSDP.  This difference was due to higher GSDP figure reported by the state.  
Sources: Uttar Pradesh Budget Documents of various years; CAG; PRS.

Finances of State Public Sector Undertakings

Public sector undertakings (PSUs) are set up by the government to discharge commercial activities in various sectors.  As on March 31, 2021, there were 115 PSUs in Uttar Pradesh.  CAG analysed the performance of 38 PSUs.   Out of these 38 PSUs, 22 companies earned a profit of Rs 700 crore, while 16 companies posted a loss of Rs 7,411 crore in 2020-21.  Note that both the number of PSUs incurring losses and the quantum of losses has decreased since 2018-19.  In 2018-19, 20 PSUs had reported losses worth Rs 15,219 crore.  

Figure 1: Cumulative losses incurred by Uttar Pradesh PSUs (Rs crore)
 
 image
 Sources: CAG; PRS.

Losses of power sector PSUs: Three power sector PSUs—Uttar Pradesh Power Corporation Limited, Purvanchal Vidyut Vitran Nigam Limited, and Paschimanchal Vidyut Vitran Nigam Limited—were the top loss incurring PSUs.  These three PSUs accounted for 73% of the total losses of Rs 7,411 crore mentioned above.   Note that as of June 2022, for each unit of power supplied, the revenue realised by UP power distribution companies (discoms) is 27 paise less than cost of supply.  This is better than the gap of 34 paise per unit at the national level.   However, the aggregate technical and commercial losses (AT&C) of the Uttar Pradesh discoms was 27.85%, considerably higher than the national average of 17.19%.  AT&C losses refer to the proportion of power supplied by a discom for which it does not receive any payment.

Off-budget borrowings: CAG also observed that the Uttar Pradesh government resorted to off-budget borrowing through state owned PSUs/authorities.  Off budget borrowings are not accounted in the debt of the state government and are on books of the respective PSUs/authorities, although, debt is serviced by the state government.  As a result, the outstanding debt reported in the budget does not represent the actual debt position of the state.  CAG identified off-budget borrowing worth Rs 1,637 crore.  The CAG recommended that the state government should avoid extra-budget borrowings.  It should also credit all the loans taken by PSUs/authorities on behalf of and serviced by the state government to state government accounts.

Management of Reserve Funds

The Reserve Bank of India manages two reserve funds on the behalf of state governments.   These funds are created to meet the liabilities of state governments.  These funds are: (i) Consolidated Sinking Fund (CSF), and (ii) Guarantee Redemption Fund (GRF).  They are funded by the contributions made by the state governments.  CSF is an amortisation fund which is utilised to meet the repayment obligations of the government.  Amortisation refers to payment of debt through regular instalments.  The interest accumulated in the fund is used for repayment of outstanding liabilities (which is the accumulation of total borrowings at the end of a financial year, including any liabilities on the public account).  

In line with the recommendation of the 12th Finance Commission, Uttar Pradesh created its CSF in March 2020.  The state government may transfer at least 0.5% of its outstanding liabilities at the end of the previous year to the CSF.  CAG observed that in 2020-21, Uttar Pradesh appropriated only Rs 1,000 crore to the CSF against the requirement of Rs 2,454 crore.  CAG recommended that the state government should ensure at least 0.5% of the outstanding liabilities are contributed towards the CSF every year.

GRF is constituted by states to meet obligations related to guarantees.  The state government may extend guarantee on loans taken by its PSUs.  Guarantees are contingent liabilities of the state government, as in case of default by the company, repayment burden will fall on the state government.  GRF can be used to settle guarantees extended by the government with respect to borrowings of state PSUs and other bodies.  The 12th Finance Commission had recommended that states should constitute GRF.  It was to be funded through guarantees fees to meet any sudden discharge of obligated guarantees extended by the states.  CAG noted that Uttar Pradesh government has not constituted GRF.  Moreover, the state has also not fixed any limits for extending guarantees.  

For an analysis of Uttar Pradesh’s 2022-23 budget, please see here.