7th Pay Commission Report: What does govt ‘really’ spend its money on?

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Late last week, the Seventh Pay Commission recommended a 23.6% overall increase in the salaries of central government employees and the pensions of retired central government employees. This increase is likely to cost the government Rs 1,02,100 crore in 2016-2017, the Pay Commission report estimates. This increase will work out to 0.65% of the gross domestic product (GDP) in 2016-2017. In comparison, the awards of the Sixth Pay Commission had worked out to 0.77% of the GDP.

Since the recommendations of the report came out in the public domain, there has been a lot of noise around whether the inefficient government employees need to be paid so much. Or does the government need to employ the number of people that it does? What seems like an obvious answer is not so obvious when you look at the actual numbers. But that is a question I will leave for tomorrow’s edition of The Daily Reckoning. Today I wanted to discuss something else. Something that will set the pretext for tomorrow’s edition of The Daily Reckoning.

The question I want to ask today is how much money does the central government spend on paying salaries and pensions. The accompanying table provides the answer.

Year Pension Salary(Pay,Allowances,
Travel Expenses)
Total
2013-2014 74,896 121,188 196,084
2014-2015 81,705 137,807 219,512
2015-2016
(estimated)
88,521 149,524 238,045

Source: http://www.indiabudget.nic.in; In Rs Crore

Looking at these numbers in isolation doesn’t tell us much, other than the fact that the latest salary plus pensions bill of the central government comes to Rs 2,38,045 crore. Let’s look at them as a proportion of the total expenditure as well as the total receipts of the government, to give us a much better idea how big the spending on salaries and pensions is.

Year Salary + Pension Total govt expenditure Salary + Pension as a
% of govt expenditure
2005-2006 58,490 506,123 11.56%
2013-2014 196,084 1,559,447 12.57%
2014-2015 219,512 1,681,158 13.06%
2015-2016
(estimated)
238,045 1,777,477 13.39%

Source: http://www.indiabudget.nic.in ; In Rs Crore

As can be seen from the above table, the salary plus pensions bill of the central government as a proportion of the total expenditure has gone up over the years. From making up around 11.56% of the total government expenditure, ten years back, it has jumped to around 13.39% in 2015-2016.

A possible explanation for this might lie in the fact that the number of central government employees has gone up during the last ten years. In 2005-2006, the central government employed around 32.3 lakh people. In 2015-2016, it employs around 35.5 employees.

Further, the number of pensioners has also jumped from around 38.41 lakhs to 51.96 lakh (as on January 2014, I couldn’t find the latest number of pensioners). Given this, it is not surprising that the salary plus pensions bill of the government has gone up.

But that is just one way of looking at it. The other way of looking at is that more than 13% of government’s expenditure is on basically on around 88 lakh individuals (the salaried lot plus the pensioners of the central government). Consider the fact that India’s population is more than 120 crore, you realise that this spending is concentrated on a certain section of the population and their families. But does that mean that the government should be smaller than it currently is? The answer is not so straightforward. As I said, I will answer that question in tomorrow’s column.

It needs to be mentioned here that the total expenditure of the government is met through borrowing because the government doesn’t earn enough to meet all its expenditure. Given this, how do things look when we compare the salary plus pension bill to the total receipts of the government (i.e. tax and non-tax revenue less the borrowings).

Year Salary + Pension Total receipts Salary + Pensions as a
proportion of total receipts
2005-2006 58,490 359,688 16.26%
2013-2014 196,084 1,056,589 18.56%
2014-2015 219,512 1,168,530 18.79%
2015-2016
(estimated)
238,045 1,221,828 19.48%

Source: http://www.indiabudget.nic.in ; In Rs Crore

So what does the above table tell us? The government spends around one out of the every five rupees that it earns on paying pensions and salaries. And that is a pretty high portion of what it earns.

So how much money is left with the government to spend on important things like infrastructure, health, education, etc. Before I answer this question, I need to get some more data points in.

The government spends a lot of money in paying interest on the debt that it has taken on to finance its expenditure. And it also spends a lot of money repaying the debt as it falls due.

Year Salary +
Pension
Interest on
Debt
Repayment
of Debt
Total Total
receipts
Ratio
2005-2006 58,490 130,032 222,658 411,180 359,688 114.32%
2013-2014 196,084 374,254 162,976 733,314 1,056,589 69.40%
2014-2015 219,512 411,354 200,955 831,821 1,168,530 71.19%
2015-2016
(estimated)
238,045 456,145 225,574 919,764 1,221,828 75.28%

Source: http://www.indiabudget.nic.in ; In Rs Crore

The above table makes for a very interesting reading. In 2013-2014, the government spent nearly 69.4% of its receipts on paying salaries, pensions and interest on its accumulated debt, and repaying the debt that fell due. In 2015-2016, this had gone up to nearly 75.3%. How does the scene look when we compare this to the total expenditure of the government?

Year Salary +
Pension
Interest on
Debt
Repayment
of Debt
Total Total govt
expenditure
Ratio
2005-2006 58,490 130,032 222,658 411,180 506,123 81.24%
2013-2014 196,084 374,254 162,976 733,314 1,559,447 47.02%
2014-2015 219,512 411,354 200,955 831,821 1,681,158 49.48%
2015-2016
(estimated)
238,045 456,145 225,574 919,764 1,777,477 51.75%

Source: http://www.indiabudget.nic.in ; In Rs Crore

The first thing that the table tells us is that the situation is not as bad as it was in 2005-2006, when more than80% of the expenditure of the government was on salaries, pensions, paying interest on debt and repaying debt. Things have improved since then. Nevertheless, the government still incurs more than half of its expenditure on salaries, pensions, paying interest on debt and repaying debt. What this tells us very clearly is that the government doesn’t have much money left to be spending on the important areas of physical infrastructure, education, health etc.

With a further increase in pensions and salaries on the way, this is only going to get worse. The government will have even lesser money left to be spending on important things like education, health, infrastructure etc.

So what is the way out? For that you will have to wait for tomorrow’s column.

This column originally appeared on The Daily Reckoning on Nov 23, 2015

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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