Dear Comrades,
Challenges before the Seventh Pay Commission
Growth
has fallen in the last couple of years eroding revenue while inflation
remains stubbornly high. The new pay commission will have to factor in
both concerns
Why does the government appoint a pay commission every decade?
A pay panel is
appointed every decade to review and recommend the pay structure for
central government employees taking into account various factors such as
cost of living, inflation rate, revenue growth and fiscal deficit of
the government, growth in workforce, private sector job scenario and
wages, and economic growth. The government has so far appointed six pay
commissions. The demand for a permanent pay commission set up through an
Act of Parliament has been raised once but it was not accepted by the
government.
Earlier this
month, Prime Minister Manmohan Singh approved the constitution of the
Seventh Pay Commission—to be headed by retired Supreme Court judge Ashok
Kumar Mathur—to suggest the extent of hike in salaries of the
7-million-plus central government staff and pensioners with effect from
2016. Petroleum secretary Vivek Rae has been appointed as a full-time
member, NIPFP director Rathin Roy will be part-time member and Meena
Agarwal will be member-secretary of the new pay panel.
How did the process of pay hikes evolved?
The pay panel
recommendations have evolved with time. The first central pay commission
(CPC) adopted the concept of “living wage” to determine the pay
structure of the government staff. The third CPC adopted the concept of
“need-based wage”. The fourth CPC had recommended that the government
constitute a permanent machinery to undertake periodical review of pay
and allowances of its employees, but this was not accepted by the
government. The sixth CPC suggested performance related incentive scheme
(PRIS) to replace the ad hoc bonus and productivity-linked bonus
schemes. The pay panel also suggested that the running pay band be
extended to all grades of officers. Also, the sixth pay panel suggested
slashing of the number of grades to 20 and one distinct pay scale for
secretaries from the 35 existing earlier.
By how much have the public sector salaries increased every decade following the pay panels’ recommendations?
By and large,
the salaries of central government staff have tripled every decade. The
sixth CPC suggested 3 times increase in salaries from that of fifth CPC
levels—it was 2.6 times for lower grade officials and slightly above 3
for higher grade staff. The increase in salary during fifth CPC was
3-3.5 times the fourth CPC levels.
What has been the fiscal implication of pay hikes?
Government
finances have come under strain after implementations of each CPC. After
the fourth CPC, the combined fiscal deficit of centre and states rose
to 9.5% of GDP in FY87 from 7.7% in FY86. The impact was significantly
harsh during the fifth CPC, especially for states—the combined fiscal
deficit rose from 6.1% in FY97 to 7% in FY98 and then to 8.7% in FY99
with the aggregate deficit of states surging from 2.6% to over 4%.
In the case of
the sixth CPC, the government expenditure increased by about Rs 22,000
crore during 2008-09—Rs 15,700 crore on the general budget and Rs 6,400
crore on the rail budget. The Rs 18,000 crore arrears were distributed
in two years—40% in FY09 and 60% in FY10. The fiscal implication of
sixth CPC coupled with fiscal stimulus in the form of higher spending
and tax cuts after the Lehman crisis, increased Centre’s fiscal deficit
to 6% in FY09 and 6.5% in FY10 from less than 3% in FY08.
What are the challenges before seventh CPC?
The new pay
panel faces many challenges when it starts the process of reviewing the
pay structures of babus. First, the economic growth has slowed sharply
in the last 10 years—from over 9% between FY06 and FY08 to 4.5% in FY13.
This means slower revenue growth and little room for scaling up
expenditure on salaries.
Second, the
Fiscal Responsibility and Budget Management (FRBM) target has already
been revised more than twice after the Lehman crisis and the new target
for lowering the fiscal deficit target to 3% of GDP is FY17. This again
binds the government to restrict spending on salaries and wages.
Third and the
most important factor, inflation has stayed high in the past few
years—the CPI inflation (CPI-Industrial Workers and the new CPI) has
averaged over 9% in the past eight years, which means cost of living has
gone up significantly and hence necessitates higher compensation for
workers. The dearness allowance of government staff has already touched
100%, which along with the rise in other allowances have more than
doubled salaries since 2006.
Analysts expect
the seventh pay panel to suggest 3-3.5 times hike in salaries across
various grades from sixth CPC levels apart from a further
rationalisation of government staff. Already, direct or permanent jobs
in public sector have been shrinking while engagement of contract labour
and outsourcing is on the rise. This trend is likely to continue given
the fiscal imperatives of the government.
There is a
perception that government salaries should rise faster at the higher
grades and slowly at the lower grades to keep pace with private sector.
It needs to be seen whether the seventh CPC retains the minimum:maximum
ratio at sixth CPC level of 1:12. A hike in the ratio should not impinge
the fisc much as the top level officials—joint secretaries and
above—comprise less than 5% of the overall public sector workforce. The
performance related incentives could also be reviewed to retain talent
within the public sector. More than the fiscal implication, what matters
is the productivity of the public sector. For instance, sluggish
clearances needed for large projects have ruined investment and halved
the growth rate in last three years. The silver-lining of the next CPC
could be that it may boost the services sector growth and help revive
the faltering economy from 2016 as higher salaries boost spending on
housing, automobiles and consumer electronics.
Source : http://www.financialexpress.com
