The 5th Pay Commission (1997) looms large in everyone's memory, for the damage it did to Indian public finance. It has taken years of effort to claw back to the fiscal numbers that prevailed prior to the implementation of that Commission's recommendations. Now there are demands that a 6th Pay Commission be constituted. | |
| The pressure on public finance is very real and should not be understated. The fiscal responsibility and budget management (FRBM) law requires the elimination of the revenue deficit in another four years. While the FRBM Task Force (headed by Vijay Kelkar) had shown a road map for achieving this, its most important recommendation""the Goods and Services Tax""has not yet been taken up seriously. Strengthening tax administration on the direct tax side, through initiatives like the Tax Information Network, has helped obtain remarkable buoyancy in direct tax collections. But the newfound importance of the corporation tax can cut both ways. Corporate profits will not always rise, year after year. There will, inevitably, be a business cycle downturn, during which profits will shrink. |
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| Then, there are the grandiose spending programmes of the UPA. If Indian economic policy from 1991 has concentrated on accelerating growth, the UPA seems to be in a mood to cash in on the fiscal elbow room this has provided. The immediate fiscal impact of the new programmes is small, since it takes time for the government to build its own administrative capacity to spend on such a scale. But in a year or two, the country could see an unhappy combination of heightened spending, a business cycle downturn, and the build-up to the next elections. The last thing that should be added to that toxic brew is even a weak version of the last Pay Commission. |
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| Leaving aside the fiscal constraint, do salaries of government servants need to be raised? As recent research has demonstrated, 98 per cent of civil servants are paid too much. Salaries in the civil service exceed the equivalent market-driven salaries at all junior levels. A recent calculation pointed out that the salary of one teacher in a government school in Rajasthan was large enough to fund a complete private school. |
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| The only sensible notion about wage growth is that salaries need to be high enough to attract good enough candidates. There is no reason why wages at all levels have to go up. The task is that of continually adjusting wages to reflect the market price of a good candidate. The flood of youths who are keen to get clerical jobs in government proves that the government pays too much at these levels. Conversely, when we get to senior level positions, government salaries are pathetically inadequate and need to be sharply increased. |
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| If a 6th Pay Commission is appointed and can think sensibly, there is work to be done: since salaries can't be cut, they should at least not be changed at junior levels, and at senior levels they should be raised by two to five times. This would not cost much in financial terms since most government employees are at junior levels, but the political task may be beyond the UPA. However, given the UPA's track record for low-quality economic thinking, this scenario is exceedingly unlikely to materialise. It is much more likely that the country will get something as foolish as the last Commission's recommendations, or worse. Hence, the only sensible course is to wait out till the next elections, and hope that a better economic policy capacity comes about. |
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