Himachal Pradesh and Uttarakhand Finances 2015-16

San Fransisco, California, (USA): This paper attempts to analyse the composition of revenue receipts and revenue expenditure for the two neighbouring western Himalayan States of Himachal Pradesh and Uttarakhand after the dispensation of the Fourteenth Finance Commission.  Their ages differ  as Himachal Pradesh is about 44 years old as a State whereas Uttarakhand is about 15 years old. Uttarakhand has had about a dozen Chief Ministers as aginst five for Himachal Pradesh after attaining statehood. Himachal Pradesh had to evolve its own developmental strategy and path wheras Uttarakhand had a model in Himachal Pradesh which it could use and improve. Few basic facts need to be mentioned in the beginning. The area of Himachal Pradesh at 55673 square kilometres is marginally larger than the area of Uttarakhand at 53483 square kilometres. According to the 2011 census, the population of Himachal Pradesh at 68.57 lakh is considerably lower than that for Uttarakhand at 101.17 lakh. Both the States have a very difficult topography and are located side by side in the western Himalayas. In terms of availability of socio-economic infrastructure and attainment of the social and economic indicators, Himachal Pradesh stands at a much higher level than Uttarakhand. The average annual per capita gross State domestic product(per capita income) for the three years 2010-11, 2011-12 and 2012-13 for Himachal Pradesh at Rs. 106285 is about 10 per cent higher than the corresponding figure of Rs. 95971 for Uttarakhand. Given these similarities and disparities, the presentation of the budgets by the two neighbouring western Himalayan States after the implementation of the Fourteenth Finance Commission award has been analysed in this brief paper and it makes an interesting comparison. According to the Fourteenth Finance Commission, Uttarakhand becomes revenue surplus after the devolution of the share in central taxes, whereas Himachal Pradesh has huge revenue account deficit which is met by the revenue deficit grant by the Finance Commission. As for the budget, both the States have a very small revenue account surplus in the proximity of Rs. 40 crore for the year 2015-16.

 Let us first of all look at the revenue account of these States based on the actuals for 2013-14, budget estimates for 2014-15 and budget estimates for 2015-16. This needs to be viewed in the light of the fact that Himachal Pradesh is better off in 2015-16 as compared to 2014-15 by Rs. 8703 crore in terms of central devolution whereas the corresponding figure of incremental devolution for Uttarakhand is only Rs. 1734 crore. Needless to say, these incremental devolutions are inclusive of the central assistance for plan financing for these States, since the schemes for its devolution from the Union Budget have been discontinued with effective from 1^st April, 2015. There would be no central asssistance for the developmental plans of these States which they may formulate within the realm of feasibility of available resources. The aggregate data depicting the revenue account is presented in the following table:-

(Rs. crore)

Whereas the data for 2013-14 is presented for the purposes of a brief historical understanding, the analysis should restrict itself to 2014-15 and 2015-16 budget estimates. For these two years, the total expenditure for Himachal Pradesh recorded a growth of 10.12 pr cent for 2014-15 and 20.0 percent for 2015-16. The corresponding growth in the case of Uttarakhand was 37.42 per cent and 7.70 per cent, respectively. The growth in the revenue expenditure should generally follow the growth in aggregate expenditure because the revenue expenditure constitutes a very significant component of the total expenditure. What actually comes out is that the growth in revenue expenditure for Himachal Pradesh for 2014-15 over 2013-14 was 14.01 per cent and 18.72 per cent for 2015-16 over 2014-15. The corresponding figures for Uttarakhand are 46.72 per cent and 8.18 per cent, respectively.  The revenue receipts recorded a growth of 5.16 per cent and 42.46 per cent for Himachal Pradesh for the same reference years in comparison to 41.30 per cent and 5.32 per cent for Uttarakhand, respectively. The growth figures of revenue receipts for the two States clearly bring out the fact about the disparate devolution from the Finance Commission to these States.

A comment is necessary on the total revenue receipts for 2015-16 for both the States. For Uttarakhand, the improvement is of the order of Rs. 1303 crore whereas the incremental devolution from the Finance Commission is Rs. 1734 crore. There is an inconsistency in these figures. The total revenue receipts for Uttarakhand should at least have been Rs. 1734 crore more for 2015-16 as compared to 2014-15, which is not so. Second comment is that the own revenue receipts of the State for 2015-16 appear to be lower than 2014-15 by at least Rs. 431 crore implying that there has been a demobilisation of State’s own revenues instead of the nominal trend growth. This needs to be explained by the State Government.

Talking of Himachal Pradesh, the total revenue receipts show an increase of Rs. 7013 crore for 2015-16 as compared to  2014-15. On the other hand, the incremental devolution for the State for 2015-16 over 2014-15 is of the order of Rs. 8703 crore. It is improbable that the State’s own tax and non-tax revenues would go down by a whopping amount of Rs. 1690 crore for 2015-16 as compared to 2014-15. This is an inconsistency of a much larger magnitude and the State Government needs to explain to people as to how and why it comes about.

Coming to the composition of the revenue expenditure, we look at the data for the year 2015-16 as it captures the latest situation.

The data is presented in the table below:-

                        Major Components of Revenue Expenditure                         (Rs. crore)

What one observes is that the expenditure on salaries and pensions for Himachal Pradesh is a little over 52 per cent of the total revenue expenditure whereas the corresponding percentage for Uttarakhand is a little over 43 per cent. In that context, Uttarakhand is placed in a slightly better position. This is mainly because of the fact that Uttarakhand has a much smaller pension burden as compared to Himachal Pradesh. In the longer run, the pension burden of Uttarakhand will keep declining because the new employees hired after April, 2003 are not entirely the State Government’s burden for their pension payments. The pension burden of Himachal Pradesh will take much longer time than Uttarakhand to taper off. Uttarakhand is only 15 years old State of which the employees hired in the first three years of its existence will be entitled to full pension from the public exchequer. On the other hand, Himachal Pradesh came into existence in 1971 as a full-fledged State and has a much longer time frame of 42 years for which the retirees of which the full pension liabilities will have to be borne by the State.

As to the salary burden, the two States are not very differently placed from each other. Containment of the salary expenditure is a difficult and contentious political issue. What the two States need to do is to extract higher productivity from its existing strength of employees rather than hiring more. The outreach of social infrastructure has reached near saturation levels and there is very little merit in further expansion. What is required is consolidation and quality improvement of services like education, health, drinking water, housing for the poor, social security, etc. A specific mention of quality improvement is necessary because better human capital is a sure way for ensuring higher growth, and it goes without saying that the current schooling and university system in these two States is producing more unemployables. Even in the field of provision of health services by the States, the salaries take close to 80 per cent of the budget expenditure and the provision for delivery of services of better quality in terms of medicines, supplies, etc. is too little. The other constraint is critical gaps in the availability of health personnel from doctors down to nurses, technicians, etc.  Policies in this direction need to be re-written for enhancing productivity of the human capital.

The expenditure on interest payments is another committed liability which requires measures for containment to be put in place. With the FRBM parameters of fiscal deficit and revenue deficit in place, borrowings by the States will have a cap for contracting fresh debt and in that perspective, the States should be in a position to contain interest liability burden within manageable limits. The best practice would be to start generating revenue account surplus and use that for development and improvement of service delivery, and restrain from contracting fresh debt so that the new interest liabilities do not add on at the same pace as has been happening in the recent decade when the debt cap regime came into existence. A longer view and deeper concern on utilisation of public funds at the political level has to be developed and brought into practice so that the present culture of cheap populism as a measure for winning votes gets done away with.

In the present scenario, effective maintenance of existing economic infrastructure definitely deserves a higher priority as compared to creation of new infrastructure. Pre-emption of resources for creation of new infrastructure should be strongly merit and economic need based to avoid waste of public funds. The figures of maintenance expenditure for Uttarakhand cause an alarm. Either it is a case of the total maintenance expenditure being broken down to various components and showing only the material and supplies expenditure as the maintenance expenditure or it is a case of gross under-provision for maintaining the existing infrastructure. With almost identical infrastructure, Himachal Pradesh has a provision fourteen times higher as compared to Uttarakhand. This probably requires clarification to put the issue in the correct perspective.

Making a brief comment on the total revenue receipts, it is observed that in the case of Himachal Pradesh, the receipts for 2015-16 indicate a quantum increase over 2014-15. This increase is overwhelmingly attributable to the increase in the revenue deficit grant for the State. The revenue deficit grant part of the revenue receipts is about one-third of the total revenue receipts and this component is not to grow in the coming four years. Therefore, it needs to be kept in mind that for the next four years, the growth in the total revenue receipts will be a function of the State’s own tax and non-tax effort and the buoyancy in the central tax collections.  The central transfers for 2015-16 account for about 50 per cent of the total revenue receipts of the State. As for Uttarakhand, the total central transfers for 2015-16 at Rs. 5526 crore constitute only about 21.4 per cent of the total revenue receipts. The rest being State’s own tax and non-tax effort holds a good potential for the State to enhance receipts and get a revenue account surplus towards mitigation of the interest liabilities.

Map: Courtesy Google

DK Sharma

Devinder Kumar Sharma, a former Principal Adviser and Secretary Planning, Government of Himachal Pradesh, is a visiting professor and an economist. He lives in Shimla.