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)
Read at: The Hindu
Read more: http://www.staffnews.in/2015/09/seventh-pay-commission-is-no-ogre-tt.html#ixzz3l2FB9t5a