Reserve Bank of India?s word of caution to the states on adopting the recommendations of the Sixth Pay Commission appointed by the Centre deserves immediate attention. The finances of the states have improved lately, and they should not be allowed to go into a tailspin again. In all, the states are expected to spend Rs 1,30,483 crore this fiscal on wages and salaries for their seven million odd employees?which is more than twice the number on the rolls of the central government. Past salary revisions had pushed up this bill to a high of 39% of total revenue spending, and it was only a gradual reduction in the number of employees and efforts at expenditure tightening that brought the proportion down to a somewhat manageable 29% now. It is true that there is wage pressure, as there always is during an economic boom. But the boom?s peak may be behind us, and future prospects do not support arguments for an across-the-board pay hike across all states. In any case, the emoluments of state employees differ sharply among states. For instance, the Uttar Pradesh government, which has the largest number of employees, spends almost the same amount as West Bengal, where the size of the state bureaucracy is just about half, implying a much higher average take-home. Likewise, wages and salaries as a fraction of total revenue spending also vary substantially across major states, ranging from a low of only 10% in Gujarat to more than 40% in Maharashtra.
Apart from the capacity to pay, which also differs from state to state, there are macroeconomic issues to consider, like the quality of fiscal management. Recent figures of revised estimates for 2006-07 show that only eight of 17 major states had a revenue surplus, notably Gujarat. The other nine states were running a revenue deficit, with Bihar, Kerala, Punjab, Jharkhand and West Bengal the worst fiscal performers. Deficit states that fail to cut back on wage spending have to scrimp on development spending to sustain their profligacy, and this worsens inter-state imbalances in the country. Both Maharashtra and West Bengal, for example, have a development expenditure to gross state domestic product ratio of under 10%, and being deficit states, they have very little space to make amends. Neither can justify pay hikes. Nor can several others.