Tuesday, September 08, 2015

Who's afraid of the Seventh Pay Commission?

The Seventh Pay Commission looms. This is already giving rise to serious apprehensions about the impact on the fisc and negative comments about a government workforce that is said to be overpaid at the lower levels. Here are the standard comments and my responses to these:

i. SPC award will damage the fisc: Total pay of central and state government employees is 5% of GDP. The government projects a pay increase on the average of 16%. This translates into an impact on the fisc of 0.8%. Amortised over five years, the impact is 0.16%- hardly something to get worked up about.

ii. Where is the need for a Pay Commission every 10 years when government employees get DA increases? : Well, over a ten year period, after taking into account DA increases as well the annual increment of 3%, pay typically rises by less than 50%. This is less than the rise in nominal GDP of around 100%. After the Pay Commission hike, we get an increase in 10 years that is slightly below the nominal GDP increase (so pay and allowances as a proportion of GDP have fallen). The increase is way below what happens in the private sector. If the Pay Commission hike were not there, it would become difficult for government to compete for talent at the top, even after taking into account non-pay benefits such as job security, prestige, etc

iii. Government workforce is bloated and needs pruning: It has got bloated in recent years mainly on account of increases in police and paramilitary forces. We need more doctors, teachers, engineers, etc. Pay and allowances as a proportion of total government revenues has been falling by 1% every year. This is not downsizing as conventionally understood- that is, reduction in numbers of personnel. But, in financial terms, it is certainly downsizing. Wages are becoming less and less of a burden on government revenues, which is to be expected when central government revenues grow at 17% and the rise in annual wages is way below that.

The explosion in pay in the private sector is creating huge inequalities in Indian society. Pay in government should be seen as a sort of corrective to private sector excesses. It is not as much of a problem in fiscal terms as it used to be (although you could always argue that savings in wages can be used for other purposes).

It would best to accept periodic pay rises as a given and to focus instead on training and capacity building in the work force. Don't fret about the cost, instead get the best out of the workforce in terms of service delivery.

More in my article in the Hindu, Seventh Pay Commission is no ogre.


Ashish Gupta said...

Not sure what part of Private Sectors you are comparing. For teachers and clerical workers, Govt Pays are huge compared to Pvt sector. That, combined with unofficial flexible hours, no accountability, and pathetic conditions of public services mean that such hikes are undeserved. May be same cannot be said of specific services you mentioned like Engineers or Doctors.

T T Ram Mohan said...

Ashish, Yes, pay at the lower levels in the public sector is superior to that in the private sector. As I mention in my Hindu article, this is inevitable given that: i. pay has bear some relationship with that in the private sector and ii. the ratio of maximum to minimum pay in the public sector has to be within a reasonable band.


Anonymous said...

Dear Prof,

Many thanks for the wonderful article and your views: as always brilliant points.

@Ashish G

Sorry the private sector too offers pathetic service, inherently eager to exploit its customers and importantly barely pays any taxes (invests more in inventing loopholes rather dutifully pay up for the nation).
Yes, I neither work for the government nor have any relationships to generate a bias.

Best wishes!

T T Ram Mohan said...

Thanks Anonymous. Yes, the private sector too offers pathetic service but this doesn't prevent people at the top walking away with outsized bonuses