The recommendations of the Seventh Pay Commission are now with the government, perhaps the first time that this has happened before the new compensation formulae are scheduled to be implemented - in this case, from January 2016. There are both macro and micro implications of the suggested increases. From the macro perspective, an important contrast with the proposals of the Sixth Pay Commission is the relatively moderate aggregate increase - just short of 24 per cent, compared with 35 per cent last time. This amounts to just over Rs 1 lakh crore from the general and railway budgets combined. Of course, as increases are rolled out through state governments and other related hierarchies, the total impact will be much larger; but, for the moment, the finance minister says this will hit the Centre's fiscal space by about 0.65 per cent of the country's gross domestic product.
In terms of timing, the potential stimulus to consumption from the implementation will be welcome in a situation of sluggish growth. Reserve Bank of India Governor Raghuram Rajan's statement that there is 30 per cent excess capacity in Indian industry highlights the rather dim prospects for a broad-based investment revival. So, any acceleration in growth will have to come primarily from consumption spending, backed perhaps by increased public expenditure on infrastructure. In 2008, the recommendations were implemented with the payment of more than two and a half years of salary arrears, so the boost will be smaller. The main thing that will have to be watched is the fiscal impact; there are some concerns that the deficit target will be missed.
On the micro side, there is a significant increase at the top of the scale, with the Cabinet Secretary's salary being pegged at Rs 2.5 lakh per month, a significant increase from the current level. The overall structure has been simplified, with the creation of a pay matrix, which allows for progression based on performance. The recommendation that laggards not be eligible for annual increments is well-intentioned, but clearly is not supported by the almost token appraisal system that is in place today, particularly at the lower levels. That apart, the Commission has been rather conservative in not making any significant recommendations relating to roles and responsibilities. Perhaps it felt that these would be ignored like in the past, so they weren't worth the effort. However, the fact is that the environment is changing so rapidly that simply increasing compensation once a decade while paying little attention to the structure and functions of government reflects a partial approach to the problem. An important component of the recommendations is the time parity proposed between those belonging to the Indian Administrative Services and to other services, although there is dissent on this. Also, the Commission has suggested a broad uniformity in the One-Rank-One-Pension formula across civilian and paramilitary services. It appears that there will be appreciable macroeconomic benefits from the recommendations without too much of an increase in fiscal pressure. But, as far as service delivery is concerned, the tweaks do not add up to a substantial change in incentives. More money should be accompanied by greater accountability, meaningful rationalisation of workforce and a robust linkage between productivity and performance.
