Friday, March 21, 2008

Salary rises that don’t pay

Armies, if they are not given more money, get restless. It’s no different for the 5.5-million-strong army of employees in the Union government’s pay. Never mind if they have no guns, they still have 5.5 million bullets called votes. The Sixth Pay Commission is the answer to this problem.
In a recent report, The Indian Express said the upswing in salaries for employees could be as high as 42% of what they get now. The issue at hand is not the mere quantum of increase and the outgo from the government purse, but its economic and social impact.
One argument that is made in favour of salary revisions is that governments need to attract talent to manage the affairs of the state. This is a red herring, as a former cabinet secretary T.S.R. Subramaniam recently pointed out. Not more than 5-6% of these employees are required to run governments. The remaining number does more harm than good.
In fact, the most crucial aspect of pay commission recommendations, that of linking salaries with performance, is always ignored by governments. If this is done, these jobs would not survive. In fact, if a proper audit of “waste” due to such expenditure were made, government deficit would have an entirely different spin to it.
The impact of such salary increases is, however, much more pernicious as it’s not limited to the Centre. Indians do not live in the “Centre”; they live in the states. State governments began to phase in the Fifth Pay Commission awards in 1997-98. It immediately led to wage increases of 30%. Pensions, which were indexed to real wages by the commission, added to the financial chaos. The gap between state revenue receipts and expenditure rose from slightly more than 1% of GDP in 1997-98 to a whopping 2.5% of GDP in a single year by 1998-99. It took seven years from the implementation of the last award for the states to get their finances back to where they were in 1997-98. These were India’s lost years.
State expenditures in vital areas such as education, health, irrigation and road maintenance, etc., fell during this time. For example, for the seven poorest states (Jharkhand, Uttar Pradesh, Rajasthan, Bihar, Orissa, Madhya Pradesh and Chhattisgarh), these expenditures came down drastically during this period. The government needs to take a hard look at the idea of periodic wage revisions while governance continues to plumb ever lower depths.