Central Government Employees: Challenges before the Seventh Pay Commission
- by Raj Kumar Ray (Financial Express)
SUMMARY
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:
Challenges before the Seventh Pay Commission[http://www.financialexpress.com/news/challenges-before-the-seventh-pay-commission/1226949/0]
