It is a comment on the state of the Indian economy that what was once considered by broad consensus a recipe for fiscal disaster is now being presented as an opportunity for boosting growth. The very thought of the Seventh Pay Commission and its expected recommendations for an increase in the salary and allowances for over 4.8 million government employees (including in the defence forces) would send shivers down the spine of many a proponent of fiscal discipline. The example of the Sixth Pay Commission and the havoc it played with the government's fiscal deficit would be cited to explain that fear. It would also be argued that it was not just a question of the Union government's fiscal deficit growing wider, the damage would be even more for all the states, which would accept the pay increases recommended by the Commission even though their fiscal capacity would be limited and strained.
The debate now taking place in the wake of the Seventh Pay Commission recommending a 23.5 per cent increase in pay and allowances for government employees has centred not so much on fiscal slippages but more on the benefits it might bring to a sluggish economy. Nobody is denying the Rs 1 lakh crore of fresh burden on the central exchequer. But, at the same time, almost everybody is drawing attention to the relatively lower impact it would have on government finances, citing at least four reasons.
One, there will be no burden of past arrears because all recommendations will be implemented prospectively, unlike those of the Sixth Pay Commission, which came late and had to be enforced retrospectively. Two, the extent of the increase will be much lower - almost 11 percentage points less than what was recommended by the Sixth Pay Commission. Three, the future damage to the government's finances has been limited to a great extent as there is a virtual freeze on fresh recruitment at the lower levels of bureaucracy as the outsourcing of jobs and hiring of people on contracts at relatively low salaries are on the rise. And four, the current inflation environment is a little more benign than what prevailed the last time the pay commission awards were implemented - a factor that might reduce the risks, and the enormity of the task of those who have to keep inflation under control.
There is a fifth reason cited by those who believe that the Seventh Pay Commission awards may not turn out to be as big a disaster as was feared earlier. This is about the consumption stimulus from the Rs 1 lakh crore of extra money that would be released to close to five million government employees. The expectation is that this money would raise either the savings rate or consumption demand. The Indian economy needs both quite badly. Given both the continuing tepid growth in credit and the situation with public sector banks' stressed assets, investment demand is not likely to act as an effective trigger for higher growth. In any case, a revival in investment demand will take more time. In the short term, therefore, the only hope for boosting growth is a push to consumption demand - while the government continues to invest more in infrastructure, which should encourage the private sector to commit more investments in the coming months even as the banking sector's health too gets better by then.
There is, however, a danger in over-relying on such a consumption stimulus to ensure higher growth. Even if the assumptions behind the limited nature of the adverse impact of the Seventh Pay Commission on the government are correct, it would be a fatal mistake on the part of the government to lull itself into policy inaction, believing that the big threat from the government pay hike has been averted and instead it is turning out to be an ally in its efforts to revive growth. This is because the pay commission blues may be over, but there are at least five big challenges that await the government if growth has to pick up to the desired level.
One, the challenge of cleaning up the taxation system and introducing the goods and services tax (GST) regime cannot be underestimated. While laudable moves have been made to set up committees that would clean up taxation procedures, the government must also accept the political challenge of making the necessary concessions to the Opposition parties and meeting them at least half-way to amend the GST proposals. If this political challenge is overcome, the economy will be a big gainer.
Two, policies with regard to international trade constitute an area that is crying out for some attention. India's exports have declined for the last 11 months. That imports too are falling is no solace. A revival in domestic manufacturing will also depend on India's ability to plug itself into new international trade regimes, without which exports would pose an even bigger challenge. There is an urgent need for a new leadership in the government to steer India's trade policy and its engagement with the world's key trading blocs.
The remaining three challenges pertain to investments, banking sector reforms and building government capacity to debate and discuss policies in response to changing economic scenarios. The government must learn to restrict itself to framing policies, and entrust the task of investing and creating infrastructure to the private sector or public agencies that have been created for this purpose. Cleaning up the banking mess as far as stressed assets are concerned is as important as building capacity within the government to debate and offer advice on policy matters. The coming weeks will show how serious the government is about tackling these basic challenges.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
