GS-3, Indian Economy, Indian Polity, Public Admin 2, Uncategorized

7th Pay Commission: Why we must not grudge them a pay hike?

Many sections of the society are unhappy with the recommendations of the seventh pay commission. They are opposed to the increases in pay for Central government employees. But, when compared to pay increases and bonuses in the private sector, the pay hikes recommended by the seventh pay commission are modest.

  • Analysts warn of slippages in the fiscal deficit, a possible boost to inflation, and a setback to public investment due to these hikes. However, the finance ministry has clarified that the impact on the fiscal can be easily digested by the Indian economy.

Factors considered before setting a minimum pay in government:

Pay commissions arrive at a figure for minimum pay in government with reference to norms laid down by the 15thIndian Labour Conference (ILC) in 1957.

  • The ILC had said that the minimum wage should cover the basic needs of a worker and his family, that is, a spouse, and two children who are below the age of 14.
  • The seventh pay commission has spelt out the norms it has used for determining basic needs. It has gone by food requirements specified by a well-known nutritionist along with provisions for clothing, fuel and lighting, education, recreation, festivities, medical expenses, and housing.
  • The commission has also provided an addition of 25% to the total to provide for the skill factor (the basic needs having been determined for an unskilled person).

Based on the above mentioned norms, the commission arrives at a minimum wage of Rs. 18,000 for a government employee.

  • This is 2.57 times the minimum pay in the Sixth Pay Commission.
  • The increase over the projected pay on the current basis as of January 1, 2016 is 14.3%.
  • This is the second lowest increase recommended by any Pay Commission since the first one, and it is way below the 54% increase following the last one.

Reversed position:

According to these recommendations, pay at the lower levels of government will be higher than in the private sector. However, at the top, the position is reversed, that is pay at higher levels of government will be lower than in the private sector.

  • Various studies have shown that pay in the private sector today is contributing towards massive inequalities in Indian society.
  • Thus, having the reversed structure in government is a useful corrective to trends in the private sector. It will help contain tensions created by rising inequality.

Impact on the finances of central government:

  • The impact of the pay hike on the Central government (including the railways) will amount to 0.65% of GDP. This is less than the impact of 0.77% of GDP on account of the Sixth Pay Commission.
  • The impact on the Central government (excluding Railways), which is what matters when it comes to the Union budget, is 0.46% of GDP. In reality, the impact will be much more less as some of the increase in salary comes back to the government as taxes.

Thus, the overall impact on the fiscal at the central level is barely noticeable.

Positive implications of the hike:

  • Increased pay for government employees means greater government expenditure and hence a fiscal stimulus — provided government expenditure on other counts is not reduced and the fiscal deficit rises.
  • Greater income in the hands of government employees could favourably impact sectors such as the real estate, automobiles and consumer goods.

Past trends:

  • Pay and allowances in the Central government have remained stable since 2010-11 at around 1.8-2.0% of GDP. They have been rising at roughly the same level as nominal GDP or 11-12%. This is the increase after taking into account increments, adjustments for dearness allowance and promotions.
  • Pay, allowances and pension (PAP) as a proportion of government expenditure has been declining sharply. In 1998-99, PAP was 38% of revenue expenditure. This figure has further fallen to 18% in 2015-16.

Thus, in financial terms, the workforce in government has been effectively downsized by nearly half over the past 17 years.

Government workforce in India:

  • India’s central bureaucracy (including the Railways but excluding the armed forces) has neither been increasing in recent years nor hugely bloated in absolute terms.
  • The number of employees grew to a peak of 41.76 lakh in 1994. It has declined since to 38.9 lakh in 2014.
  • Of the total, 13.8 lakh is accounted for by security-related entities (police and defence civilians). Railways and Post, which perform commercial functions, account for 15 lakh personnel.

India Vs the United States:

  • In 2012, the non-postal civilian workforce in the U.S. was 21.3 lakh. In India, the corresponding figure in 2014 was 17.96 lakh.
  • The number of personnel per lakh of population in India was 139 in 2014, way below the figure of 668 for the U.S.

The Finance Ministry has insisted that it will stick to its fiscal deficit target for 2016-17 even after providing for the SPC pay hike. The government now should concentrate on conducting periodic management audits of government departments on parameters such as cost effectiveness, timeliness and customer satisfaction. Improving service delivery in government is also the key issue which needs to be addressed.


 

  • In today’s climate of liberalisation, the socialist government is viewed withT-T-Ram-Mo-min hostility.
  • The present government is facing criticisms from the media and public at large, over the increases in pay for Central government employees recommended by the Seventh Pay Commission (SPC).

 

 

Why is the hike by SPC criticised?

The analysts believe that the hike would affect the fiscal deficit negatively, a possible boost to inflation and a setback to public investment.

Is the criticism valid?

How the does the pay commission come out with the figures?

  • The Commission has a rigorous basis for setting pay in government.
  • It arrives at a figure for minimum pay in government with reference to norms laid down by the 15th Indian Labour Conference (ILC) in 1957.
  • The ILC had said that the minimum wage should cover the basic needs of a worker and his family, that is, a spouse, and two children who are below the age of 14.

 

Has SPC followed the guidelines given by 15th ILC?

  • The SPC has spelt out the norms it has used for determining basic needs.
  • It has gone by food requirements specified by a well-known nutritionist.
  • To this are added provisions for clothing, fuel and lighting, education, recreation, festivities, medical expenses, and housing.
  • There is an addition of 25 per cent to the total of the above to provide for the skill factor (the basic needs having been determined for an unskilled person).
  • The SPC report provides detailed computations for each of these items.
  • No reasonable person can accuse the SPC of being overgenerous.

 

Comparing SPC hike with sixth pay commission hike:

  • Based on above norms, the SPC arrives at a minimum wage of Rs. 18,000 for a government employee.
  • This is 2.57 times the minimum pay in the Sixth Pay Commission.
  • The increase over the projected pay on the current basis as of January 1, 2016 is 14.3 per cent.
  • This is the second lowest increase recommended by any Pay Commission since the first one, and it is way below the 54 per cent increase following the last one.

 

Comparing pay in government and private sector:

  • As before, pay at the lower levels of government is higher than in the private sector and at the top, the position is reversed.
  • Pay in the private sector today is contributing towards massive inequalities in Indian society. Having a very different structure in government is a useful corrective to trends in the private sector.
  • It will help contain tensions created by rising inequality.

 

Impact on government finances:

So far as the impact on government finances is concerned, the SPC numbers provide a stream of good news.

  1. The impact of the pay hike on the Central government (including the railways) will amount to 0.65 per cent of GDP. This is less than the impact of 0.77 per cent of GDP on account of the Sixth Pay Commission.
  2. The impact on the Central government (excluding Railways), which is what matters when it comes to the Union budget, is 0.46 per cent of GDP. As some of the increase in salary comes back to the government as taxes, the impact, net of taxes, will be even less say, 0.4 per cent of GDP (assuming an average tax rate of around 20 per cent on government pay).

Bad news for the military personnel:

Why?

A look into the history:

Start at the beginning. There were two main categories of central government employees: the “All India Services” – the IAS, IFS, IPS, IFoS and the military.

The second is Organised Group “A” Services – Customs & Excise, Railways, Border Roads Organisation, Indian Ordnance Factory Service, and a host of others.

  • The 3rd Central Pay Commission(CPC), which was convened in 1970 (and the first without a military member), formally granted the IAS and IFS superiority over all other services.
  • In justification it argued that “an IAS officer gets an unequalled opportunity of living and working among the people, participating in planning and implementation of developmental programmes, working with the Panchayati Raj institutions, coordinating the activities of government departments in the district and dealing directly with problems of law and order.”
  • Given this responsibility, the IAS and IFS were granted an extra increment over other services.

 

The SPC bombshell recommendation is that to elevate IPS and IFoS in match with IAS and IFS leaving behind the military.

How far this move by SPC be justified?

Way Forward:

  • At the time of the Sixth Pay Commission higher wages for government employees contributed to a higher fiscal deficit.
  • This time round, the Finance Ministry insists that it will stick to its fiscal deficit target for 2016-17 after providing for the SPC pay hike. If it does so, the pay hike will not lead to greater loss for the government exchequer.
  • However, greater income in the hands of government employees could favourably impact sectors such as the real estate, automobiles and consumer goods.

Connecting the dots:

  • Critically evaluate the recommendations of Seventh Pay Commission.
  • Critically examine the reasons for setting up pay commissions by successive governments over the years.

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