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Why Congress’s promise of return to Old Pension Scheme poses a huge challenge to its new Govt in Himachal

If the likely new Congress government in Himachal follows through on the party's old pension scheme promise, managing the state’s finances may prove to be an uphill task. Here is why.

Himachal elections, himachal election result, Himachal Pradesh elections 2022, congress, old pension scheme, express explained, indian expressA Congress worker burns firecrackers celebrating the party's lead in Himachal Pradesh Assembly elections, at AICC headquarters in New Delhi, Thursday, Dec. 8, 2022. (Photo: PTI)

The trends of the Himachal Pradesh Assembly election results indicate a defeat of the ruling BJP and a win for the Congress, which has promised to restore the Old Pension Scheme (OPS) in the state.

The OPS figured as a prominent election promise in the Assembly elections in the two states, triggering debates that went beyond the political arena. Two Congress-ruled states — Rajasthan and Chhattisgarh — have already decided to implement the OPS, and the party had promised to restore it in Gujarat and Himachal Pradesh if it came to power.

The Congress has crashed to its worst defeat in Gujarat, but if its likely new government in Himachal follows through on the party’s campaign promise, managing the state’s finances may prove to be an uphill task. Here is a look at state of finances of Himachal Pradesh — and the challenge that it poses to the new finance minister.

Mounting committed expenditure means shrinking scope for spending on development.

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As per data in the latest State Finances Audit Report of Himachal Pradesh for the year ended March 31, 2021, the committed expenditure of the state — which comprises interest payments, expenditure on salaries and wages, and pensions — had increased from Rs 17,154.75 crore in 2016-17 to Rs 22,464.51 crore in 2020-21.

As a percentage of the revenue receipts, the committed expenditure has increased from 65.31 per cent to 67.19 per cent over the last five years. The committed expenditure has been hovering around 67 per cent of the total revenue expenditure of the government during the last five years (2016-21).

The rising committed expenditure means that a lesser revenue is available with the state government for development expenditure. For instance, during 2020-21, only about one-third of the state’s total revenue receipts were available for developmental outlay.

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One-fifth of the state’s revenue expenditure is now spent on paying the pensions bill.

During 2020-21, the expenditure on pensions stood at Rs 6,088 crore, which was almost 50 per cent higher than Rs 4,114.17 crore in 2016-17. In fact, as a percentage of revenue receipts, the expenditure on pension has increased from 15.66 per cent in 2016-17 to 18.21 per cent in 2020-21.

As a percentage of revenue expenditure, the pension expenditure has increased from 16.23 per cent to 18.16 per cent in the last five years.

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Own Tax Revenues make up only a small share of the state’s total revenues.

Only about a fourth of the state’s revenue comes from its Own Tax Revenues (OTR). During 2020-21, out of the total revenue (Rs 33,438 crore) of the state, only Rs 8,083 crore came from the state’s OTR.

In Himachal Pradesh, the growth in OTR, which comprises taxes like State GST, State Excise, Stamp Duty and Registration Fees, Land Revenue, Taxes on Vehicles, Goods and Passengers, has remained very low in recent years.

Data from the Comptroller and Auditor General of India (CAG) show that Himachal Pradesh’s OTR increased by 14.84 per cent to Rs 8,083 crore in 2020-21 from Rs 7,039 crore in 2016-17. In the year preceding the pandemic (2019-20), Himachal Pradesh’s own taxes as a ratio of total revenue receipts stood at just 24.80 per cent, which was lower than the all-state average ratio of states’ own tax to total receipts (38.04 per cent) in that year.

Revenue buoyancy, or efficiency of revenue mobilisation in response to growth, is declining.

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There has been a decline in the revenue buoyancy of the state. The revenue buoyancy ratio refers to the elasticity or degree of responsiveness of a fiscal variable with respect to a given change in the base variable. For example, if revenue buoyancy with respect to Gross State Domestic Product (GSDP) is 1.21, it means that revenue receipts tend to increase by 1.21 percentage points if the GSDP increases by 1 per cent. During 2020-21, revenue buoyancy with respect to the GSDP in Himachal Pradesh was minus 2.27 per cent.

First published on: 08-12-2022 at 14:53 IST
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