Article on 7th Pay Commission: India needs a skill-based wage system of govt employees, not a 1:12 ratio between lowest and highest paid

Why don’t governments learn from experience/mistakes; why are they prisoners of precedent; why do vote bank considerations invariably override national/economic interests? The government’s announcement of setting up the Seventh Pay Commission throws up these very thoughts. The government has blindly followed the past practice of successive governments since 1947 when the First Pay Commission was set up. The Indian economy has undergone a sea change since then—structural transformation of the economy, technological revolution, global integration, rising governance, skill and knowledge deficits and, above all, transformation from a public-sector-led growth model to a private-sector-led growth model. Should the wage policies for government employees not capture these changes and address the challenges that we are facing?

For an objective analysis of the government’s decision we need to understand the political, fiscal, governance and economic dimensions.

Much has been commented upon on the timing of the announcement and its political ramifications. Political leaders have lost no time in claiming credit for the announcement to curry favour with their perceived vote bank. Pay commissions, in the past, have been set up after every 10 years and the 10-year period after the Sixth Pay Commission would be over by 2015. The hurry shown at this juncture needs to be contrasted with the thinking in the NDA government in 2002-03 to delay the announcement because of the grave fiscal situation facing the government. One can only wish that the alacrity shown by the government to make this announcement were matched by similar urgency in dealing with other problems facing the economy. I remember that in 1998 when the recommendations of the Fifth Pay Commission were being considered, the then finance minister was opposed to the large pay-outs involved without ensuring staff rationalisation and, as a protest, he went to the extent of missing the Cabinet meeting in which the decision to accept the recommendations was taken. Given the impending elections it would perhaps have been prudent that the government that seeks to reap the political benefits of the decision should also be the government that has to deal with its fiscal and economic consequences.

It is unfortunate that political expediency considerations have prevailed over the government’s commitment towards fiscal consolidation. The government’s five-year fiscal consolidation roadmap aims to bring down the fiscal deficit in 2016-17 to 3% of GDP. How can one reconcile commitment to rein in fiscal deficit with the large outgo that the Pay Commission recommendations will entail? The central pay commissions also lay down a benchmark for salaries and pensions for PSUs, state governments, universities, aided institutions, cooperative societies and so on, who follow the same pay structure without any consideration of their capacity to pay. The huge consolidated fiscal burden can only be at the cost of investment, poverty reduction and growth.

Having said that, it, nonetheless, needs to be appreciated that expenditure of 12% of the budget on employee wage bill is not high by global standards. It is the skill mix, efficiency and productivity of the employees that is a problem. Painting all categories of government employees—whether they are scientists, teachers, doctors, defence and security forces, generalists, railway employees, Group C and D staff—with one brush and placing them in the ambit of a single pay commission creates enormous anomalies and creates a premium on mediocrity over merit. We need a skill-based wage system of government employees instead of striving for an artificial ratio of 1:12 between the lowest and highest paid employee.

Many government reports, including that of the recent Administrative Reforms Commission, have highlighted the various shortcomings of our administrative structure. The large skill and knowledge deficit and preponderance of an unskilled workforce is not suited to meet the challenges of a diversifying and complex economy. Many ministries and agencies that were needed in early stages of our development with a commanding roll for the public sector have outlived their utility. At the same time, there are newer emerging areas, especially in regulations for growth of a healthy private sector, which require government’s focus. The central government continues to have large outfits in sectors which are state subjects leading to avoidable duplication, inefficiencies and costs. The Expenditure Reforms Commission set up in 2000 had given many useful suggestions for right sizing the government structure. A thorough exercise to rationalise the bureaucracy should have preceded setting up of a new pay commission. This subject should now form an integral part of the commission’s Terms of Reference.

It is not that successive pay commissions have totally side-stepped the non-fiscal governance-related issues. Governments have shown promptness in accepting the pay-related recommendations but have generally ignored other recommendations. For example, the 5th CPC had recommended slashing of government employees by 30%, delayering the system by reducing number of scales from 51 to 34; 6th CPC had proposed a liberal severance package, corporatisation of Indian Railways, abolition of Indian telecom service, reducing the number of government holidays to 3, rationalisation of overtime and bonus policies. None of these recommendations have seen the light of day.

There is another major economic consequence of the pay commissions that has not got sufficient attention. Government employees constitute not more than 5% of the total workforce in the economy. The 95% workers outside the government sector are paid wages based on market considerations and capacity of the employers to pay. A large number of government employees in the middle and lower rungs are drawing wages much higher than their counterparts in the private sector and are also enjoying benefits of job security and retirement benefits. Such a large mismatch in the wage structure has the effect of spoiling the job market for the private sector. Small businesses and self-employment ventures are unable to pay salaries of R25,000-plus to drivers and R30,000-plus to office assistants etc. As a result, rising public sector wage bill not only has adverse consequences for the exchequer but also leads to queering the pitch for private businesses.

Governments need to factor in these economic consequences while determining public sector wages. It can make a beginning by including this item as one of the Terms of Reference for the Seventh Central Pay Commission.

Having taken a populist decision to set up the pay commission, the government should carefully craft its Terms of Reference so that a more balanced view on wage policy for public employees is taken and pay increases are used to leverage governance reforms.