Saturday, September 29, 2007

6500 as new minimum Basic Pay

An article that came in Malayalam daily - Mathrubhumi

It is known that the sixth pay commission has decided to unify the increment dates and retirement dates for all the central govt. employees. Accordingly the retirement date will be December 31st and the increment falls on January 1st. The minimum basic pay will be 6500.

The pay commission chaired by Justice B N Shrikrishna has decided to reduce the number of pay scales from existing 39 to 16. The retirement ages will stay at existing 60 years.

Based on the speculation of the mid-term poll, the finance ministry has asked the commission to submit the pay structure alone. The detailed report will only be submitted later

The recommendations will be to implement the scales with effect from January 2006. However the arrears due to the additional allowance will be calculated with effect from January 2007. The commission has recommended from 6pc DA from January 2007 and 14pc from January 2008.

As per the recommendations, the minimum basic scale for the central government employees will be 6500-150-9500(Group D). The existing scales which starts with 2650 and 2750 will be merged to a new scale of 7500-250-12500 for the group D staff. The scales starting with 4000 and 4500 will be merged and made into 10300-300-17500.

The employees in the A1 cities comprising of Delhi, Mumbai, ChennaI, Kolkotta and Bangalore will get an HRA of 30pc of the basic pay subject to a maximum of 12000. The HRA for AB1, B2 and other places will be 15pc(6000 max), 7.5pc(3000 max) and 5pc(2000 max) respectively. The CCA will be 4pc(1200max),3pc(900max),2pc(600max) and 1pc(600max) respectively.  The conveyance allowance in the A1 and A cities will be 6pc of basic(2400max for gazetted and 1200 for non-gazetted). At other places this will be 3pc(1200/600 max).

The employees will have to contribute 10pc of the basic pay towards the PF.The employees in different groups will have to pay 400/200/100/50 towards the Insurance schemes.

While retiring the employees can encash 360 days (currently  300 days) of accumulated leaves. The pension commutation can be done for 60pc against the existing 40pc.

New Proposed scales

The new pay scales to be proposed by the sixth pay commission

  1. 6500-150-9500
  2. 7000-200-11000(auxiliary staff- Gr D)
  3. 7500-250-12500
  4. 10000-300-17500(supporting staff - C)
  5. 12500-400-22500
  6. 15000-500-27000 (supervisory staff,B,non-gazetted)
  7. 17500-650-30500 (asst. officer)
  8. 20000-8000-36000 (junior scale)
  9. 25000-1000-40000 (senior scale under secretary)
  10. 30000-12000-48000 (deputy secretary)
  11. 42000-1400-55000 (director)
  12. 60000 (fixed) (joint secretary)
  13. 65000 (fixed) (additional secretary)
  14. 70000 (fixed) (special secretary)
  15. 75000 (fixed) (secretary)
  16. 80000 (fixed) (cabinet secretary)

source : (Malayalam)

Thursday, September 27, 2007

Tenth anniversary of Fifth Pay commission

This month is the tenth anniversary of the United Front (UF) government’s profligate decisions on the report of the Fifth Pay Commission (FPC). It’s an event worth recalling (though not celebrating) for at least two reasons. First, these decisions had serious adverse consequences for India’s economy and public finances lasting through most of the Ninth Plan period (1997-2002). Second, with the Sixth Pay Commission (SPC) launched last year and its report expected in late 2008 or early 2009, it is interesting to speculate about the possible outcome, which could impact significantly on India’s future development trajectory.

Back in 2001 I wrote “the FPC effects constitute the single largest adverse shock to India’s strained public finances in the last decade, with corresponding negative consequences for aggregate savings and investment in the economy”. Six years later I stand by that assessment. The September 1997 decisions resulted in pay and pension increases of 40 per cent and higher to central government employees, which were soon emulated by state governments. Importantly, the pay and pension increases decided by the government were much higher than those recommended by the FPC for the vast majority of employees. The sociology of the decision-making was simple. The FPC had recommended the large increases of 40 per cent plus for the executive grades of the government system (exemplified by the IAS/IFS/IPS, etc) and much lower increases for the vast majority of lower rank employees (even by the most liberal definitions the “executive grades” account for less than 5 per cent of government employees). This is because the FPC judged government executives to be underpaid relative to comparators in the private sector but deemed this not to be the case for the vast majority of government employees (such as clerks, peons, service workers, teachers, etc).

Confronted by union pressure the UF government succumbed and accorded the large increases to virtually all government employees, with the unfortunate consequences that reverberated for several years. At the macro level, the combined fiscal deficit of the Centre and states rose from 6.4 per cent of GDP in 1996/7 to 9.9 per cent in 2001/2, while the revenue deficit (a close approximation of government dissavings) doubled from 3.6 per cent of GDP in 1996/7 to 7 per cent in 2001/2. About half of this fiscal deterioration was directly attributable to the FPC decisions. As I have pointed out elsewhere (Business Standard, November 30, 2006), the marked worsening of the fiscal position was a notable cause behind the deceleration of economic growth in the period 1997-2002 , following the post-reforms boom of 1992-97. Conversely, the growth surge of 2002-07 has been helped significantly by the fiscal consolidation of recent years. 

Source: RBI, Handbook of Statistics on Indian Economy, September, 2006 and Annual Report, 2006/7.

There were other major adverse effects of the FPC decisions. The perennially stressed finances of state governments became much worse. Rising pay and pension obligations preempted spending on material and investment inputs for education, health, roads and other basic infrastructure. Thus, the actual public service provision and development capacities of state governments suffered enormously during these years and it is doubtful whether they have recovered fully in the present decade. Second, the FPC-driven pay increases worsened the dualism in India’s labour markets. For example, it widened the gap between the pay of government school teachers and those appointed by local communities and private institutions, thus stunting the incentives for non-government initiatives for provision of social services. Third, by transferring about 1.5 per cent of GDP to about 3 per cent of the country’s labour force (government employees and all in the “formal sector”) the FPC decisions probably worsened income inequality in India and were no help to the poor. Fourth, government pay increases led to similar increases in public sector units and probably strengthened the vested interests against the policies of disinvestment and privatisation. 

Alright, the FPC decisions took a substantial toll of India’s development momentum and fiscal health for several years. What of the future? What can we expect from the SPC and the decisions on their recommendations? As regards the latter, that is, the government’s decisions on prospective SPC recommendations, the only thing it may be safe to conclude is that the government of the day (most likely another unwieldy coalition) is very likely to decide pay increases in excess of whatever recommendations the SPC makes. And what might those be? Obviously, we will only know when the SPC report becomes available. Till then we can only speculate. Let me voice my main concern.

It seems to me that the main new factor that has emerged in the past decade, and especially in the last six or seven years, is the dynamism of India’s private corporate sector and the sharp increases in corporate executive remuneration. Never mind that the corporate world in India is highly diverse and there are a huge number of small struggling companies with ill-paid executives. The dominant impression, fanned by the press and TV, is one of super salaries in large, fast-growing companies. Against this background the SPC will be under heavy pressure to recommend large pay increases for executive grades of government employees, probably even more so than in 1996. If that happens, it’s hard to see how India can avoid another large fiscal shock with the kind of unfortunate chain of economic consequences that resulted from the FPC. Even if the recommended pay increases for the 95 per cent plus of “non-executive” government employees are modest, the sociology of decision-making that occurred with the FPC recommendations is quite likely to prevail again. If government “executives” get X per cent increase, then that is likely to be the realistic increment for all employees. And then we shall see a rerun of the negative economic and public finance consequences that were triggered by the FPC decisions.

At least, that’s my worry. I hope the esteemed members of the SPC will prove me wrong with their report.

Saturday, September 15, 2007

Pay commission could derail government finances

A fresh wave of fiscal profligacy threatens to undermine four years of hard-won improvements in Indian public finances.

The Sixth Pay Commission, set up last year to recalibrate the wages of 5.5 million federal government workers, is scheduled to submit its report in April 2008.

If the panel is anywhere near as generous as its predecessor 10 years ago --

the Fifth Pay Commission recommended a 31 percent increase in base salaries,

effective from 1996 -- the economy will pay a heavy price.


Such wage increases would crimp the Reserve Bank of India's ability to cut interest rates next year, should slowing global growth and rising risk aversion warrant monetary easing.

The ruling Congress Party's alliance with Marxist groups is in trouble over the latter's opposition to an India-U.S. civilian nuclear agreement, and many analysts expect Prime Minister Manmohan Singh to call for elections some time in 2008, one year ahead of schedule.

It's quite likely, therefore, that the budget in February will provide some "interim relief" as a sop to voters.

This may be a major reason why there won't be a quick reversal of the Indian central bank's hawkish monetary-policy stance even though credit growth is slowing, auto sales are falling and inflation is at a 16-month low of 3.8 percent.

The wage increases for federal employees will be matched by the 28 Indian state governments and municipalities, even though the latter two have limited scope to boost their own revenue.

Government-owned companies, too, will have to pay more. Some of them have already begun making provisions for a hefty increase in their wage bills.

The Bangalore-based Bharat Electronics, which makes electronic voting machines for the world's biggest democracy, took a hit on margin when it set aside an extra 13 percent of sales revenue for employee-related costs in the quarter ended June 30.

Steel Authority of India, the biggest state-run Indian steel maker, has made similar provisions for a couple of quarters now.

Within the government, everyone from aerospace scientists to railway engineers has made a case to the Pay Commission for higher remuneration and perks.

"It would not be surprising if the Sixth Pay Commission came out with an award that made the wage structure in government compatible with that of the private sector in order to enable government to attract and retain talent," two economists, Adarsh Kishore and A. Prasad, wrote in a recent study published by the International Monetary Fund.

That realignment should logically lead to wage cuts for clerks and chauffeurs, who are much better paid than they would be in the private sector. Of course, that would never happen. Pay will go up across the board for everyone.

The consolidated budget deficit of the national and state governments in India has narrowed to 6.1 percent of gross domestic product. That's a 3.5 percentage-point improvement from four years ago.

The target, according to a budget-management law that took effect in 2004, is for the deficit to be reduced to 6 percent by 2009. With tax collections booming, that target should be easily achievable. It will be a shame, therefore, if the Pay Commission spoils it all.

The last Pay Commission was responsible for pushing down overall government savings by 2.9 percentage points of GDP between 1996 and 2000.

That kind of slippage, were it to occur now, would leave the government authorities with an additional resource shortfall of about $30 billion. Much-needed public investments in infrastructure - roads, ports, airports, power stations, railways and urban amenities - will suffer.

And just like in the last round of pay increases, states will bleed more than the government in New Delhi.

"The Sixth Pay Commission award would most certainly create a pull effect on states, encouraging them to raise wages," said Kishore and Prasad. "This is bound to create additional stress on the financial position of states."

Given the acute need for investments in infrastructure, estimated at a staggering $475 billion over the next five years, the Indian government's priority should be to pare its budget deficit and improve its credit rating.

The ratio of public debt to GDP in India is about 0.8; and this doesn't include borrowings guaranteed by the government or accumulated losses of state electricity boards. Almost 27 percent of the government's revenue is spent on paying interest.

For more than nine years, Moody's Investors Service has left the local-currency rating of India unchanged at Ba2, two levels below investment grade.

If the Indian government had a better rating, it would be able to borrow rupee funds cheaply from a diversified group of global investors without having to rely on financial repression.

Indian banks would be more competitive if they didn't have to invest a quarter of their deposits in government bonds. That would, in turn, lower the cost of credit for companies, spur economic activity, create jobs and reduce poverty.

A more balanced budget is also a prerequisite for quicker progress toward dismantling capital controls. All of that is now at risk because of a probable wage increase for civil servants.