Municipal Budget Classification and a Salary Hike Proposal
The newly constituted Municipal Council of a town in Rajasthan is finalising its budget. Estimated receipts: tax revenue ₹4.2 crore; non-tax revenue ₹1.1 crore; State Finance Commission grant ₹2.5 crore (revenue grant); sale of surplus land ₹2.0 crore; bank loan ₹2.5 crore. Estimated expenditure: salaries ₹4.5 crore; maintenance ₹1.2 crore; interest ₹0.5 crore; construction of a community hall ₹3.0 crore; purchase of equipment ₹0.8 crore; repayment of loan principal ₹1.5 crore. The chairperson proposes a new recurring salary hike of ₹2.0 crore per year, to be funded from the land sale proceeds, saying 'it is all government money'. The accountant must classify receipts and expenditure, compute the revenue surplus or deficit and the fiscal deficit, and advise whether the proposal is sound.
1. Classify the receipts and expenditure and compute the revenue surplus or deficit and the fiscal deficit.
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Revenue receipts = tax ₹4.2 crore + non-tax ₹1.1 crore + revenue grant ₹2.5 crore = ₹7.8 crore.
Revenue expenditure = salaries ₹4.5 crore + maintenance ₹1.2 crore + interest ₹0.5 crore = ₹6.2 crore.
Revenue surplus = ₹7.8 crore − ₹6.2 crore = ₹1.6 crore.
Capital receipts = sale of land ₹2.0 crore + bank loan ₹2.5 crore. Capital expenditure = community hall ₹3.0 crore + equipment ₹0.8 crore = ₹3.8 crore. Loan repayment ₹1.5 crore is a financing item, not revenue or capital expenditure.
Fiscal deficit = total expenditure − total receipts excluding borrowings = (₹6.2 crore + ₹3.8 crore) − (₹7.8 crore + ₹2.0 crore) = ₹10.0 crore − ₹9.8 crore = ₹0.2 crore.
2. Advise whether the land sale proceeds should fund the recurring salary hike, showing the revised revenue position if approved.
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The proposal is unsound. Sale of land is a one-time capital receipt; a salary hike is recurring revenue expenditure. If the ₹2.0 crore hike is approved, revenue expenditure becomes ₹6.2 crore + ₹2.0 crore = ₹8.2 crore, while revenue receipts remain ₹7.8 crore. The council would move from a revenue surplus of ₹1.6 crore to a revenue deficit of ₹0.4 crore.
The land sale would be consumed in one year, and the higher salary would continue in later years without a matching revenue source. It would also reduce capital receipts available for asset creation. The council should reject the hike, phase it only with identified recurring revenue, or link it to own-source revenue mobilisation. Using capital receipts for salaries masks a structural deficit.
3. The State Finance Commission grant is later found to be tied to a sanitation scheme. How should it be treated in the accounts and in the salary proposal?
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A tied grant is not free general revenue. It should be recorded as a revenue receipt only to the extent it is used for eligible revenue expenditure under the sanitation scheme; if it funds a capital asset, the related expenditure and grant should be classified accordingly. A separate scheme account should track receipts, expenditure and unspent balance, and any refund or return condition must be respected.
The grant cannot be diverted to salaries. Therefore the ₹2.5 crore cannot be counted as flexible revenue supporting the salary hike. The council must rework its free revenue position using only untied receipts and should disclose the tied grant separately.