The implementation of the 7th Pay Commission for State government employees can lead to steep increase in committed expenditure over the next several years and would pose a severe challenge in maintaining fiscal deficit targets of the State in coming years, said Medium Term Fiscal Plan (MTFP) for 2024-2028.
Depending on the fitment factor, the additional financial implication of implementing 7th pay scale would range between ₹15,000 crore and ₹20,000 crore for the first year of implementation.
Chief Minister Siddaramaiah in his Budget (2024-25) said that the 7th Pay Commission is formed for revision of pay-scale of government employees and after receiving a report from the commission, it would be examined and suitable action taken.
The State government has been spending ₹1,59,526 crore for committed expenditure such as salaries, pensions, interest payments, and administrative expenses. Committed expenditure constituted 61% of the revenue receipts of ₹2,63,178 crore.
According to MTFP, ₹80,434 crore is needed for salaries, ₹32,355 crore for pensions, ₹40,263 crore for interest payments, and ₹6,474 crore for administrative expenses for the year 2024-25. It cautioned the government that committed expenditure was witnessing steeper year-on-year increase that directly influenced overall fiscal health of the government.
Impact of OPS
The MTFP also said that switching back to the Old Pension Scheme (OPS) would be fiscally disastrous for the State finances in the long term and would lead to cutting back on welfare and development expenditure.
Most of the States, including Karnataka, have switched to New Pension Scheme (NPS). A recent report by the Reserve Bank of India on this matter has warned against switching back to OPS and the cumulative fiscal burden on OPS could be as high as 4.5 times that of NPS, MTFP said. Mr. Siddaramaiah had promised government employees on bringing back OPS.
Health of Escoms
The MTFP said the financial health of Karnataka’s Electricity Supply Companies (Escoms) and Karnataka Power Corporation Ltd. (KPCL) raised significant concerns about the State’s fiscal stability.
As of December 2023, loan guarantee issued by the State government for Escoms and KPCL has reached ₹36,657 crore. Escoms are burdened by substantially outstanding power purchase dues, loans, and accumulated losses exceeding ₹65,282 crore. KPCL faced challenges with outstanding loans surpassing ₹31,145 crore. “These precarious financial positions pose substantial risks, as potential defaults on guaranteed loans could trigger significant liabilities,” MTFP said.
It said that the government should take steps to improve revenue collection to reduce revenue deficit and create more space for welfare programmes.
