How Congress’ Promise of Old Pension Might Back Bite Them

8 December, 2022 | Pranay Lad

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Managing the state's finances may prove to be a challenge if the next Congress administration in Himachal sticks to the party's old pension vow. Why? Read on.

The Congress, which pledged to reinstate the Old Pension Scheme (OPS) in the state, is likely to win the Himachal Pradesh Assembly election, according to trends in the results.

The OPS was a key campaign pledge in the two states’ Assembly elections, sparking discussions outside of the political sphere. The OPS has already been agreed to be implemented in two Congress-ruled states, Rajasthan and Chhattisgarh, and the party had pledged to reinstate it in Gujarat and Himachal Pradesh if it won power.

The Congress suffered its worst loss in Gujarat, but if the anticipated new government in Himachal upholds the party’s election pledge, handling the state’s finances might prove challenging. Here’s a look at the status of Himachal Pradesh’s finances and the difficulty it presents for the incoming finance minister.

Reduced room for development spending results from rising committed expenditure

The committed expenditure of the state, which includes interest payments, expenditure on salaries and wages, and pensions, increased from Rs 17,154.75 crore in 2016–17 to Rs 22,464.51 crore in 2020–21, according to data in the most recent State Finances Audit Report of Himachal Pradesh for the year ended March 31, 2021.

Over the past five years, the committed spending as a proportion of revenue collections has gone up from 65.31 to 67.19 percent. Over the past five years, the committed spending has generally been approximately 67% of the government’s overall revenue expenditure (2016-21).

The increased committed spending implies that the state government has less money to spend on development. For instance, just around one-third of the state’s total income receipts for 2020–21 were allocated for development expenditures.

The state currently spends one-fifth of its earnings on paying the pensions debt.

The amount spent on pensions for 2020–21 was Rs 6,088 crore, about 50% more than Rs 4,114.17 crore during 2016–17. In actuality, the expenditure on pensions has climbed from 15.66% in 2016–17 to 18.21% in 2020–21 as a proportion of tax collections.

In the previous five years, the pension expense as a share of revenue expenditure climbed from 16.23% to 18.16%.

Only a minor portion of the state’s overall revenues come from own taxes.

Only approximately a quarter of the state’s income is generated from its own taxes (OTR). Only Rs 8,083 crore of the state’s total income (Rs 33,438 crore) during 2020–21 came from the OTR.

In recent years, the development of OTR in Himachal Pradesh, which includes taxes like State GST, State Excise, Stamp Duty and Registration Fees, Land Revenue, Taxes on Vehicles, Goods, and Passengers, has stayed remarkably low.

According to data from the Comptroller and Auditor General of India (CAG), Himachal Pradesh’s OTR climbed from Rs 7,039 crore in 2016–17 to Rs 8,083 crore in 2020–21, a 14.84 percent rise. Himachal Pradesh’s own taxes as a percentage of total revenue receipts in the year prior to the pandemic (2019–20) were just 24.80%, which was lower than the 38.04% national average for that year among all states.