In the heyday of Indian
socialism, the perception of government was benign. In today’s climate of
liberalisation, the government is viewed with hostility. That must explain the
negative reaction both in the media and amongst the public at large to the increases
in pay for Central government employees recommended by the Seventh Pay
Commission (SPC).
The pay hikes are
modest — embarrassingly so in comparison with pay
increases and bonuses in the private sector. Yet, media reports talk of a ‘bonanza
for babus’. The impact on the fiscal can be easily digested by the Indian
economy. Yet, analysts warn of slippages in the fiscal deficit, a possible
boost to inflation, and a setback to public investment. Do we want to run the
government — which comprises not just civil servants but the police, armed
forces, nurses, doctors, regulators and academics — at all? Or have we
persuaded ourselves that all of the government is simply money down the drain?
Setting pay in government
The SPC’s figures don’t come out of nowhere. The Commission has a rigorous
basis for setting pay in government. It arrives at a figure for minimum pay in
government with reference to norms laid down by the 15th Indian Labour
Conference (ILC) in 1957. The ILC had said that the minimum wage should cover
the basic needs of a worker and his family, that is, a spouse, and two children
who are below the age of 14. The SPC has spelt out the norms it has used for
determining basic needs. It has gone by food requirements specified by a
well-known nutritionist. To this are added provisions for clothing, fuel and
lighting, education, recreation, festivities, medical expenses, and housing.
There is an addition of 25 per cent to the total of the above to provide for
the skill factor (the basic needs having been determined for an unskilled
person). The SPC report provides detailed computations for each of these items.
No reasonable person can accuse the SPC of being overgenerous.
Based on these norms, the SPC arrives at a minimum wage of Rs. 18,000 for a
government employee. This is 2.57 times the minimum pay in the Sixth Pay
Commission. The increase over the projected pay on the current basis as of
January 1, 2016 is 14.3 per cent. This is the second lowest increase recommended
by any Pay Commission since the first one, and it is way below the 54 per cent
increase following the last one. The multiplication factor of 2.57 is used to
arrive at pay for all levels of government except for a few at the top where a
slightly higher multiple is used.
As before, pay at the lower levels of government is higher than in the private
sector; at the top, the position is reversed. In today’s context, this may not
be a bad thing at all. Pay in the private sector today is contributing towards
massive inequalities in Indian society. Having a very different structure in
government is a useful corrective to trends in the private sector. It will help
contain tensions created by rising inequality.
Good news
So far as the impact on
government finances is concerned, the SPC numbers provide a stream of good
news. First, the impact of the pay hike on the Central government (including
the railways) will amount to 0.65 per cent of GDP. This is less than the impact
of 0.77 per cent of GDP on account of the Sixth Pay Commission.
Second, the impact on the Central government (excluding Railways), which is
what matters when it comes to the Union budget, is 0.46 per cent of GDP. As
some of the increase in salary comes back to the government as taxes, the
impact, net of taxes, will be even less — say, 0.4 per cent of GDP (assuming an
average tax rate of around 20 per cent on government pay). This is a strictly
one-off impact. The correct way to view it, therefore, would be to amortise it
over a period of, say, five years. The annual impact then is 0.08 per cent of
GDP. The impact on the fiscal at the central level is barely noticeable.
Trends in the wage burden in the government are worth noting. Pay and
allowances in the Central government have remained stable since 2010-11 at
around 1.8-2.0 per cent of GDP. Thus, pay and allowances have been rising at
roughly the same level as nominal GDP or 11-12 per cent. This is the increase
after taking into account increments, adjustments for dearness allowance and
promotions. In the private sector, such an increase would be considered
laughable at all but the lowest level.
Pay, allowances and pension (PAP) as a proportion of government expenditure has
been declining sharply. In 1998-99, PAP was 38 per cent of revenue expenditure.
The SPC estimates that this figure has fallen to 18 per cent in 2015-16. (It
will go up to 22 per cent in 2017-17 consequent to the SPC award, but will
decline thereafter, as pay grows at a lower rate than government expenditure).
The implication is striking: in financial terms, the workforce in government
has been effectively downsized by nearly half over the past 17 years.
Pay in the private sector
is contributing towards massive inequalities in society. Having a different
structure in government will help contain tensions created by this inequality
Even in terms of numbers, India’s central bureaucracy (including the Railways
but excluding the armed forces) has neither been increasing in recent years nor
hugely bloated in absolute terms. The number of employees grew to a peak of
41.76 lakh in 1994. It has declined since to 38.9 lakh in 2014. Of the total,
13.8 lakh is accounted for by security-related entities (police and defence
civilians). Railways and Post, which perform commercial functions, account for
15 lakh personnel. There are other commercial departments as well, such as
Communications. Excluding security and commercial functions, the total central
employment is just 4.18 lakh. “The ‘core’ of the government…”, the SPC report
notes, “is actually very small…”
The SPC substantiates its point by comparing India’s Central government
workforce with that of the federal government workforce in the U.S. In 2012,
the non-postal civilian workforce in the U.S. was 21.3 lakh. In India, the
corresponding figure in 2014 was 17.96 lakh. The number of personnel per lakh
of population in India was 139 in 2014, way below the figure of 668 for the
U.S. India’s bureaucracy needs not so much downsizing as right-sizing — we need
more doctors, engineers, IT specialists, tax experts, judges, and so on.
The government is not bound by the SPC’s recommendations. It can opt for higher
pay hikes as happened with the previous Pay Commission. Assuming the government
goes along with the SPC, what impact on growth can we expect? Increased pay for
government employees means greater government expenditure and hence a fiscal
stimulus — provided government expenditure on other counts is not reduced and the
fiscal deficit rises. This happened at the time of the Sixth Pay Commission.
Higher wages for government employees contributed to a higher fiscal deficit
and helped stimulate growth in the short run.
This time round, the Finance Ministry insists that it will stick to its fiscal
deficit target for 2016-17 after providing for the SPC pay hike. If it does so,
the reduction in fiscal deficit will be contractionary. Hence, the pay hike
will not lead to economic expansion in the aggregate. However, greater income
in the hands of government employees could favourably impact sectors such as
the real estate, automobiles and consumer goods.
(T.T. Ram Mohan is professor at IIM Ahmedabad)
//copy//Courtesy : The Hindu (dt.24th Nov 2015)
