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INDIA POST
PAYMENTS BANK
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Why we must not grudge
them a pay hike
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)
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