Sunil Jain: Pay Commission disaster

RATIONAL EXPECTATIONS

Before we get bogged down with the details of the impact of the Sixth Pay Commission (SPC), on salaries as well as pensions, it has to be admitted it is a masterstroke. While the UPA will take credit for the report, and is likely to be in a position to accept it as well once it is submitted in the next 18 months, and then deliberated upon, it will be the next government that will have to foot the bill!

While reams have been written on the impact of the Fifth Pay Commission (FPC), having a recap of some basic facts would be in order. One, while the FPC had recommended the government reduce its size by 30 per cent over the decade, only the pay hike aspect got implemented. Two, according to former Chief Economic Advisor Shankar Acharya, the FPC resulted in employee compensation (salary plus pension) rising from 1.6 per cent of GDP in 1996-97 to 2.3 per cent in 1999-2000 in the case of the central government, and from 3.8 per cent to 4.7 per cent in the case of the states (Economic and Political Weekly, April 20, 2002). That is, it accounted for around half the deterioration in central and state government finances over this period! Three, despite the huge surge in government wages, salaries at the top level are between a third and half of those in the private sector, while, at the lower levels such as drivers and peons, government salaries are double""while the 12th Finance Commission has estimated the average salary of a government employee at Rs 94,000 a year, according to the AC Nielsen ORG MARG survey for the ministry of finance, the average private sector wage is around Rs 49,000.

A few points follow. If one were to double the salaries of the gazetted officers (imagine the impact of that!), this would increase the payout (only salaries, not pension) by around Rs 4,000 crore in the case of the central government, since the salary of such employees is around a tenth of the total salary payout of Rs 40,000 crore for all government employees. If, however, the SPC is similar to the FPC and hikes salaries across the board, the increased payout on account of salary alone will be a much higher Rs 11,500 crore in the first year (and another Rs 8,500 crore on account of pension that year). Since the idea is obviously to play to the gallery, an across-the-board hike is most likely, and the government will continue to have a problem in attracting talent at the top level, that is at the level of the gazetted officers.

This piece, however, is not about estimating the increase in the fiscal deficit because of the SPC. It is about the fact that it is simply not possible for the government or the SPC to calculate the impact of its recommendations since there is no firm estimate of just how many employees the government has, either at the Centre or at the states. The problem will be far worse when it comes to pension payments, which have grown at double the pace of salaries in the last decade and will soon outstrip salary payouts""so the real killer in terms of the impact on the deficit will be the pension payout of whatever the SPC proposes.

Just to give you an idea of how imprecise Pay Commission estimates can be, the Sehgal committee, which assessed the pension liabilities of the government, pointed out that while the FPC had estimated the pension payouts would increase by Rs 3,510 crore between 1997-98 and 2000-01, the actual additional payout was Rs 7,239 crore!

Even this, sadly, is a complete underestimate, because it is based on the assumption that the central government just has 4.5 million employees, including the defence personnel. Yet, as the AC Nielsen ORG MARG all-India survey for the ministry of finance found last year, 7 million people in the country say they're working for the central government""these are not people working for a road contractor building a road for the government but people who get pension and medical benefits from the government after they retire. They are the doctors in AIIMS, the teachers in Delhi University, and so on; people who don't get counted in the number of government employees, but each year, when AIIMS or Delhi University gives its expense statement to the government for reimbursement, this includes pension payments to retired staffers. The HRD ministry, for instance, has reported a total staff of just 2,697 this year even though it pays salaries to lakhs of school and college teachers.

For the states, as against the official estimates of 7.5 million employees, the Nielsen ORG MARG survey reported 13.5 million employees. Clearly, any estimates made by the SPC on the official number of employees will be a joke. "It is the Nielsen ORG MARG survey that is a joke"""this is likely to be the official response to this. But, in 2002, the ministry of labour's Employment Review put the number of people employed in quasi-government jobs at the central level in 1998 at 3.5 million, and at 5.3 million for quasi-government jobs at the levels of the states and local bodies""that is, they broadly vindicate the Nielsen ORG Marg numbers. The SPC is going to be a lot more disastrous than anyone can imagine.

suniljain@business-standard.com