In the run up to the general elections several major states are ramping up the salary bills for their employees squeezing their capital expenditure.
The impact of the higher salary expenditure could prolong the investment slowdown in the economy to the next fiscal too.
While private sector spend has dragged and the Central government has been hamstrung by fiscal deficit concerns the states were expected to provide a countervailing thrust. But this now seems unlikely.
The only two states, which will buck the trend are Tamil Nadu and Gujarat. The reasons are, however, different.
While Tamil Nadu has the fiscal space to provide for both a higher salary and higher capital expenditure, Gujarat has planned for one of the lowest rise in its salary bill for FY14.
In Central government accounts, most of the salary bill is accounted for in the non-plan expenditure, but in states, a good percentage of plan spend is accounted through salary of people employed in the schemes.
In the keenness to provide a high salary support, the states are therefore cutting into the sum they can spend on building capital assets from the plan funds.
Higher salary for government and quasi-government employees is a potent tool for states to mobilise favourable rating from the population as those employed are also often the opinion leaders.
The Central government too has announced it will set up the 7th Pay Commission for its employees. But as the tab for the additional expenditure will be picked up by the next government, the fiscal stress is absent for now.
Aware of the retrograde possibilities that a runaway salary bill provides, the Planning Commission has asked the states to provide this information separately in their financial plans.
As the accompanying chart shows, because of the rise in the salary bill, the rate of capital expenditure creation expected for FY14 has dipped to an average of 30 per cent excluding Tamil Nadu and Gujarat.
One of the worst performer in this chart is Bihar whose salary bill will rise by over 23 per cent this year including plan and