Its
recommendations’ impact need not give us jitters because the rise in
government wages will amount to only 0.8 per cent of GDP.
The
report of the Seventh Pay Commission (SPC) is set to be released soon.
The new pay scales will be applicable to Central government employees
with effect from January 2016. Many commentators ask whether we need
periodic Pay Commissions that hand out wage increases across the board.
They agonise over the havoc that will be wrought on government finances.
They want the workforce to be downsized. They would like pay increases
to be linked to productivity. These propositions deserve careful
scrutiny. The reality is more nuanced.
Critics
say we don’t need a Pay Commission every ten years because salaries in
government are indexed to inflation. At the lower levels, pay in the
government is higher than in the private sector. These criticisms
overlook the fact that, at the top-level or what is called the ‘A
Grade’, the government competes for the same pool of manpower as the
private sector. So do public sector companies and public institutions —
banks, public sector enterprises, Indian Institutes of Technology
(IITs), Indian Institutes of Management (IIMs) and regulatory bodies —
where pay levels are derived from pay in government.
The annual increment in the Central government is 3 per cent. Adding
dearness allowance increases of around 5 per cent, we get an annual
revision of 8 per cent. This is not good enough, because pay at the top
in the private sector has increased exponentially in the
post-liberalisation period.
Competition for talent
A
correct comparison should, of course, be done on the basis of cost to
the organisation. We need to add the market value of perquisites to
salaries and compare them with packages in the private sector. We cannot
and should not aim for parity with the private sector. We may settle
for a certain fraction of pay but that fraction must be applied
periodically if the public sector is not to lose out in the competition
for talent.
True,
pay scales at the lower levels of government are higher than those in
the private sector. But that is unavoidable given the norm that the
ratio of the minimum to maximum pay in government must be within an
acceptable band. (The Sixth Pay Commission had set the ratio at 1:12).
Higher pay at lower levels of government also reflects shortcomings in
the private sector, such as hiring of contract labour and the lack of
unionisation. They are not necessarily part of the ‘problem with
government’.
Perhaps
the strongest criticism of Pay Commission awards is that they play
havoc with government finances. At the aggregate level, these concerns
are somewhat exaggerated. Pay Commission awards typically tend to
disrupt government finances for a couple of years. Thereafter, their
impact is digested by the economy. Thus, pay, allowances and pension in
Central government climbed from 1.9 per cent of GDP in 2001-02 to 2.3
per cent in 2009-10, following the award of the Sixth Pay Commission. By
2012-13, however, they had declined to 1.8 per cent of GDP.
This
happened despite the fact that the government chose to make revisions
in pay higher than those recommended by the Sixth Pay Commission.
Today,
Central government pay and allowances amount to 1 per cent of GDP.
State wages amount to another 4 per cent, making for a total of 5 per
cent of GDP. The medium-term expenditure framework recently presented to
Parliament looks at an increase in pay of 16 per cent for 2016-17
consequent to the Seventh Pay Commission award. That would amount to an
increase of 0.8 per cent of GDP. This is a one-off impact. A more
correct way to represent it would be to amortise it over, say, five
years. Then, the annual impact on wages would be 0.16 per cent of GDP.
The
medium-term fiscal policy statement presented along with the last
budget indicates that pensions in 2016-17 would remain at the same level
as in 2015-16, namely, 0.7 per cent of GDP. Thus, the cumulative impact
of any award is hardly something that should give us insomnia.
There
are a couple of riders to this. First, the government is committed to
One Rank, One Pension for the armed forces. This would impose an as yet
undefined burden on Central government finances. Second, while the
aggregate macroeconomic impact may be bearable, the impact on particular
States tends to be destabilising.
The
Fourteenth Finance Commission (FFC) estimated that the share of pay and
allowances in revenue expenditure of the States varied from 29 per cent
to 79 per cent in 2012-13. The corresponding share at the Centre was
only 13 per cent. The problem arises because since the time of the Fifth
Pay Commission, there has been a trend towards convergence in pay
scales. The FFC, therefore, recommended that the Centre should consult
the States in drawing up a policy on government wages.
Downsizing needed?
It
is often argued that periodic pay revisions would be alright if only
the government could bring itself to downsize its workforce — by at
least 10 to 15 per cent. From 2013 to 2016, the Central government
workforce (excluding defence forces) is estimated to grow from 33.1 lakh
to 35.5 lakh. Of the increase of 2.4 lakh, the police alone would
account for an increase of 1.2 lakh or 50 per cent. What is required is
not so much downsizing as right-sizing — we need more doctors, engineers
and teachers.
Downsizing
of a sort has happened. The Sixth Pay Commission estimated that the
share of pay, allowances and pension of the Central government in
revenue receipts came down from 38 per cent in 1998-99 to an average of
24 per cent in 2005-07. Based on the budget figures for 2015-16, this
share appears to have declined further to 21 per cent. In financial
terms, this amounts to a reduction of 17 percentage points over 17 years
or an annual downsizing of 1 per cent. It’s a different matter that it
is not downsizing through reduction in numbers of personnel.
It
is often said that pay increases in government must be linked to
productivity. We are told that this is where government and the private
sector differ hugely. However, the notion that private sector pay is
always linked to productivity is a myth. In his best-selling book, Capital in the 21st Century,
economist Thomas Piketty argues that the explosion in CEO pay in the
West has been increasingly divorced from performance. He also argues
that the emergence of highly paid “supermanagers” is an important factor
driving inequality in the West.
We
are seeing a similar phenomenon in the private sector in India. The
serious public policy challenge, therefore, is not so much to contain a
rise in pay in the public sector as finding ways to rein in pay in the
private sector. It is also ironical that people should harp on linking
pay to performance in the public sector when high-profile firms in the
private sector such as Google and Accenture are turning away from such
measurement.
A
better idea would be to conduct periodic management audits of
government departments on parameters such as cost effectiveness,
timeliness and customer satisfaction.
Improving
service delivery in government is the key issue. Periodic pay revision
and higher pay at lower levels of government relative to the private
sector could help this cause provided these are accompanied by other
initiatives. The macroeconomic impact is nowhere as severe as it is made
out to be.
(T.T. Ram Mohan is professor at IIM, Ahmedabad)
