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Informist, Sunday, Sep 22, 2024

 

NEW DELHI – States that "rushed to give freebies are today facing a severe crisis", Finance Minister Nirmala Sitharaman said today, while making a case for the Union government's fiscally responsible welfare spending. 

 

While she did not spell out the names of such states, she cited the example of reverting to the Old Pension Scheme as one of the examples of states' fiscally imprudent decisions. "...states that announced returning to the OPS when you can't sustain it," she said, while speaking at the Pondicherry Literature Festival. 

 

In the recent past, Himachal Pradesh Chief Minister Sukhvinder Singh Sukhu had announced that he and his Cabinet ministers, along with the top brass of the government, would forego their salaries, allowances and other benefits for two months in the wake of a grave financial crisis in the state. Efforts are being made to increase revenue and reduce unproductive expenditure, though it would take some time for the results to become visible, he had said in the Assembly.

 

Himachal Pradesh's poor fiscal health is attributed to heavy borrowings, rising salary and pension budgets, reduced central aid, and inadequate revenue generation. The hill state had decided to go back to the Old Pension Scheme, which is costlier, when the Congress-led government came to power in the state in 2023. 

 

Under the Old Pension Scheme, government employees who have completed at least 10 years of service receive a monthly guaranteed pension based on their last drawn basic salary and the years of service. Under this, employees do not need to make a contribution.

 

A study in the Reserve Bank of India's September bulletin had estimated that in the long run, the shift to the Old Pension Scheme might increase the government's pension spending by over 4.5 times the outgo under the New Pension Scheme. The research paper, which reflected the views of RBI officials, called the move fiscally unsustainable.

 

As per Himachal Pradesh's Budget documents for 2024-25 (Apr-Mar), the state raised the estimate of expenditure towards pensions in the current fiscal year to 102.54 bln rupees, up 10% from the revised estimate of 93.18 bln rupees for 2023-24. Himachal Pradesh's pension expenditure is estimated to be 17% of the total expenditure of 584.44 bln rupees for 2024-25. For 2023-24, at 93.18 bln rupees, the state spent 14.7% of its total expenditure for pensions. 

 

Sitharaman said that owing to the complexity of explaining welfare schemes or tax benefits to boost disposable incomes, a section of society believes that fund transfer – as freebies – is perhaps a way for the government to stimulate the economy. The finance minister said that this sort of spending is opposed by the current dispensation as it believes in "targetted welfare delivery", while also ensuring that the fiscal deficit is maintained. 

 

"I also have a fiscal deficit target to adhere to. During COVID, it had ballooned and that was okay because of the situation, but we cannot be a government that borrows and borrows and borrows to spend," she said, adding that the government has tried to maximise welfare spending while sticking to the fiscal consolidation roadmap. 

 

The central government's fiscal deficit shot up to 9.2% in the wake of the COVID-19 pandemic, but ever since, the government has been making an effort to lower it. In the current financial year, the government has pegged its fiscal deficit at 4.9% of GDP and for 2025-26, at 4.5% of GDP. 

 

Sitharaman also spoke about half a dozen other things, including accepting that more could be done to give relief to middle-income taxpayers. "I want to humbly submit...reducing the burden of taxation is one thing which I will have to address, and I concede, more can be done, and I will try to make it," she said.

 

In her recent Budget – the Budget for 2024-25 – Sitharaman had announced measures to reduce the tax burden of individuals under the new tax regime, including raising the standard deduction to 75,000 rupees from 50,000 rupees and tweaking the tax slabs under the new income tax regime. She had said the tax changes would allow a salaried employee to save up to 17,500 rupees in income tax under the new tax regime.

 

Her move came against the backdrop of experts batting for the need to increase disposable income in the hands of taxpayers to boost consumption in the economy. 

 

"We increased the standard deduction, so the lower end can benefit it and not just the rich," she said today. She added that the income tax net could be widened so that India benefits more from a vibrant society. 

 

The finance minister also said that going forward, India would need to diversify the manufacturing sector and not depend on the services sector and agriculture and allied activities to drive the economy. "We need our manufacturing's contribution to the GDP to increase, otherwise you are only dependent on agriculture, whose growth will have to be pumped up but largely relying on services. That alone cannot help us...we will be giving a lot of attention for it," she said. 

 

The services sector currently contributes nearly 54% to GDP, while manufacturing contributes around 17%. According to latest data, India's GDP grew 6.7% in Apr-Jun. During this quarter, the services sector expanded 7.2%, manufacturing grew 7%, and the agriculture sector grew 2%.  End

 

Reported by Priyasmita Dutta

Edited by Avishek Dutta

 

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