In less than three months from now, the Union government will have to contend with a difficult fiscal challenge. Though not entirely of its making, the National Democratic Alliance government can hardly excuse itself for not taking necessary advance steps to withstand the adverse impact of the time bomb that is ticking away and in all likelihood will explode before the end of August. Yes, we are talking about the Seventh Central Pay Commission and the implications of its recommendations.
In one of the rare policy actions initiated in the latter half of its second term, the United Progressive Alliance government had ordered on February 28, 2014 the constitution of the Seventh Central Pay Commission to review the pay packages for all central government employees including those belonging to different all-India services, and personnel of governments in union territories, regulatory bodies (excluding the Reserve Bank of India) set up under an Act of Parliament and the Supreme Court of India. The Commission, headed by Justice Ashok Kumar Mathur, was also asked to recommend a suitable structure of pay and benefits for the defence forces.
There was, however, one aspect of that order that got largely ignored in the debate over the need for constituting a new pay commission a few months before the general elections were due. And that pertained to the government notification's mandate that the Commission would submit its recommendations within 18 months of the order. In other words, the recommendations would be made public before August 31, 2015, unless of course Justice Mathur decided to seek an extension of the term of the Seventh Central Pay Commission. So far the Commission seems all set to present its recommendations before the August-end deadline. This would mean that it is the NDA government that will have to take a call on these recommendations.
The prospects of an increased burden of pay and allowances on government finances, however, cannot be wished away, even if the Commission takes a few more months to complete its work. Finance Minister Arun Jaitley, therefore, would do well to keep in mind at least three lessons from the manner in which governments have faced up to the challenge of managing the recommendations of past central pay commissions.
One, apart from raising the pay and allowances for employees, the recommendations of most pay commissions in the past have also suggested measures to rationalise and reduce the government's staff strength. Invariably, all Union governments in the past have accepted the recommendations for salary revision, but have ignored the more difficult and unpopular ones on staff rationalisation. The Seventh Central Pay Commission too is expected to make some suggestions on downsizing the government's manpower strength. And Mr Jaitley should seriously consider making the acceptance of higher pay and allowances conditional to a reduction in the size of the bureaucracy as may be recommended by the Commission.
Two, the impact of recommendations of all past central pay commissions on the government's public finances have been adverse. These have always led to a significant deterioration in the fiscal deficit for the years immediately following the acceptance and enforcement of higher pay and allowances as recommended by the commission. The impact of the central pay commission recommendations is also felt on the finances of state governments, which invariably accept the new pay scales. The Seventh Central Pay Commission has been given a specific mandate that it should keep in mind the impact of its recommendations on state finances. The Centre's response to the Commission's suggestions for pay revision should, therefore, be guided by the impact they would have on state finances. If necessary, Mr Jaitley should consider the feasibility of postponing the implementation of the recommendations or other steps to reduce its impact on public finances.
Three, it is widely recognised that there has been a steady deterioration in the quality and competence of government employees, in spite of periodic salary revisions at all levels. The salary revision at the lower level of employees has mostly raised their wages to levels that are much more than what the market or the private sector pays. This has resulted in a huge rush for government jobs at the lower level of bureaucracy. Unfortunately, however, this has not led to any qualitative improvement in skills at this level because of lack of adequate and proper recruitment and screening methods. Nor has the absence of upward mobility at this level helped in getting quality manpower, since all-India services in any case block almost all avenues of promotion above a certain level.
In contrast to what has been ailing the process of government recruitment of junior employees, the salary levels for the higher levels of staff in the government has been much below the market or what the private sector pays to people with similar profiles. This has resulted in an exodus of talent at the top end of the pool of government employees, undermining the overall quality of employees at senior levels in government departments. The fear now is that the Seventh Central Pay Commission's recommendations could make the situation worse. Mr Jaitley should go beyond what the Commission says in this respect and devise methods to attract better talents at the higher level even while reducing the overall size of the government.
The current government manpower numbers are revealing. In March 2014, the total number of employees for the central government was estimated at 3.32 million. By March 2015, the employees' strength increased by five per cent to 3.5 million and by March 2016, it would go up further to 3.55 million, though at a lower rate of 1.5 per cent. In the last three years, the Union government's expenditure on salary, allowances and travel has seen a steady rise - from Rs 1.21 lakh crore in 2013-14 to Rs 1.5 lakh crore in 2014-15 - an increase of 14 per cent. For the current year, the salary bill would go up by about nine per cent to Rs 1.5 lakh crore. Taken together with the combined wages burden of close to Rs 5 lakh crore for all states, the total wage bill to be impacted by the Seventh Central Pay Commission is estimated at over Rs 6.5 lakh crore - close to five per cent India's gross domestic product. For Mr Jaitley, therefore, the challenges from what the Seventh Central Pay Commission recommends will be formidable and he needs to prepare for the consequences it will have for his fiscal consolidation plans.
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