Pay Commission be designated as ‘Pay and Productivity Commission': 14th Finance Commission
“We recommend the linking of pay with
productivity, with a simultaneous focus on technology, skill and
incentives. We recommend that Pay Commissions be designated as ‘Pay and
Productivity Commissions’, with a clear mandate to recommend measures to
improve ‘productivity of an employee’, in conjunction with pay
revisions.We urge that, in future, additional remuneration be linked to
increase in productivity.” – 14th Finance Commission
14th Finance Commission’s recommendations related to Pay Commission, Salary, Pension:- Recommendations
x. We reiterate the views of the FC-XI
for a consultative mechanism between the Union and States, through a
forum such as the Inter-State Council, to evolve a national policy for
salaries and emoluments. (para 17.28)
xi. We recommend the linking of pay with productivity, with a
simultaneous focus on technology, skill and incentives. We recommend
that Pay Commissions be designated as ‘Pay and Productivity
Commissions’, with a clear mandate to recommend measures to improve
‘productivity of an employee’, in conjunction with pay revisions.We urge
that, in future, additional remuneration be linked to increase in
productivity. (para 17.29)
xii. We urge States which have not
adopted the New Pension Scheme so far to immediately consider doing so
for their new recruits in order to reduce their future burden. (para
17.30)
Recommendations – Public Expenditure Management
118. We reiterate the views of the FC-XI
for a consultative mechanism between the Union and States, through a
forum such as the Inter-State Council, to evolve a national policy for
salaries and emoluments.
119. We recommend the linking of pay
with productivity, with a simultaneous focus on technology, skill and
incentives. We recommend that Pay Commissions be designated as ‘Pay and
Productivity Commissions’, with a clear mandate to recommend measures to
improve ‘productivity of an employee’, in conjunction with pay
revisions. We urge that, in future, additional remuneration be linked to
increase in productivity. (para 17.29)
120. We urge States which have not
adopted the New Pension Scheme so far to immediately consider doing so
for their new recruits in order to reduce their future burden. (para
17.30)
14th Finance Commission’s detail report related to Pay Commission, Salary, Pension:- Fiscal Deficit
3.4 The fiscal deficit of the Union
Government relative to GDP declined steadily from 6.1 per cent in
2001-02 to 4.5 per cent in 2003-04. The FRBM Act mandated reducing the
fiscal deficit to 3 per cent by 2008-09. The Union Government achieved
this target in 2007-08, with the fiscal deficit declining to 2.5 per
cent of GDP. However, in 2008-09 the Union Government undertook several
fiscal expansionary measures such as revision of pay scales based on the
recommendations of the Sixth Pay Commission, waiver of farm loans and
the expansion of the Mahatma Gandhi National Rural Employment Guarantee
Act (MGNREGA) to all districts from the 200 districts it was originally
slated to cover. In addition, oil prices escalated sharply, leading to a
rise in subsidy. As a consequence of all this as well as the global
crisis, the fiscal deficit of Union Government increased to 6 per cent
in 2008-09 and 6.5 per cent in 2009-10.
3.38 The share of capital expenditure in
the total expenditure of the Union Government declined from 22.8 per
cent in 2004-05 to 10.2 per cent in 2008-09 and has remained in the
range of 11 per cent to 13 per cent since then. Correspondingly, the
revenue expenditure increased to 89.8 per cent in 2008-09, and
thereafter declined only marginally, despite expenditure tightening
measures. As a ratio of GDP, the revenue expenditure of the Union
Government increased from 11.9 per cent in 2004-05 to 14.1 per cent in
2009-10 and is estimated at 12.2 per cent in 2014-15 (BE). The major
components of revenue expenditure comprising subsidies, interest
payments, defence expenditure, pay and allowances and pensions are
briefly analysed in the following paragraphs.
Major Subsidies : Pay and Allowances and Pensions
3.46 Pay and allowances of Union
Government employees more than doubled between 2007-08 and 2011-12, from
Rs.74, 647 crore to Rs.166, 792 crore due to the implementation of the
Sixth Central Pay Commission recommendations( Including Defence
Services). As a ratio of GDP, it jumped from a little over 0.9 per cent
in 2007-08 to 1.2 per cent in 2008-09 and about 1.4 per cent in 2009-10
on account of both pay revision and payment of arrears. However, it
moderated to a little over 1 per cent in 2012-13.
3.47 As in the case of salaries,
expenditure of the Union Government on pensions, which had declined to
less than 0.5 per cent of GDP in 2007-08, increased to about 0.9 per
cent of GDP in 2009-10 due to the impact of revision in pensions.
Subsequently, it came down to 0.7 per cent in 2010-11 and is estimated
at 0.6 per cent in 2014-15 (BE).
3.48 Expenditure on salary, pensions and
interest payments together accounted for 5.67 per cent of GDP in
2004-05 but declined marginally to 5.56 per cent of GDP in 2009-10, with
the rise in expenditure on salaries and pensions being more than
compensated by the decline in interest expenditure. These expenditures
declined further to 4.9 per cent of GDP in 2012-13.
Revenue Expenditure : Pensions
6.34 Pensions are another committed
liability which has been fully provided for in our assessment. The
assessment of pensions is based on the growth rate of pension
expenditure obtained from past data. The year-on-year growth of pension
expenditure has shown volatility, with growth declining to a low of 0.42
per cent in 2002-03 and increasing to a high of 70.46 per cent in
2009-10. Given these fluctuations, it is not appropriate for us to take a
long-run trend growth rate for this expenditure as a norm for
assessment. It would be more appropriate to use the observed growth in
the recent past. However, a potential fiscal liability may arise in the
future with the introduction of the ‘one rank one pension scheme’ for
Defence Services. The Budget 2014-15 has also made an additional
allocation for this scheme, which is reflected in the increase in the
growth of pension expenditure to10.67 per cent over the 2013-14 (revised
estimates) growth of 6.62 per cent. While the Ministry of Finance
projects an increase in pension payments by 8.7 per cent in 2015-16, a
30 per cent increase is expected in 2016-17 on account of the impact of
the Seventh Pay Commission, followed by an annual growth rate of 8 per
cent in subsequent years. Pension expenditures between 2011-12 and
2014-15 have grown on a year-on-year basis at the rate of 9.35 per cent
per annum. We are of the view that annual revisions in the Dearness
Allowance and annual accretions in the number of pensioners and the
corresponding pension obligations can be covered by this growth in
pension expenditure during our assessment period.
Defence Revenue Expenditure
6.35 Revenue expenditure on defence has grown at an annual rate of 11.21
per cent between 2001-02 and 2012-13 and at the rate of 10.1 per cent
between 2008-09 and 2012-13. In its submission to the Commission, the
Ministry of Defence argued that there has been a decline in the defence
expenditure-GDP ratio over the years and defence expenditure allocation
in the Union budget needs to be increased to expand the acquisition of
arms and improve defence preparedness. The Ministry pointed out that it
has not been able to make necessary procurements because of the
constraint of funds and large amounts of committed expenditure. The
Ministry also mentioned that a substantial part of the defence capital
budget went into meeting committed expenditures. The Ministry of Finance
has also highlighted the need to increase defence outlays in order to
modernise and maintain defence assets and to finance defence
acquisitions. Accordingly, its projections have provided for an increase
in defence revenue expenditure (including salaries) of 30 per cent in
2016-17 which will incorporate the Pay Commission impact, with a stable
growth rate of 20 per cent per annum in the remaining years.
Fiscal Consolidation: Assessment and Issues
14.48 Our review shows that, at an
aggregate level, States made significant improvements in complying with
the FRBM targets prescribed by the FC-XII and FC-XIII. In the pre-crisis
period, fiscal consolidation at the State level was aided by a number
of factors, including implementation of state-level fiscal
responsibility acts, debt waiver and restructuring recommended by
Finance Commissions, and improvement in revenues on account of buoyancy
of Central taxes and introduction of value-added tax (VAT) at the state
level. Despite States experiencing pressure on their fiscal balances in
the post-crisis period due to lower buoyancy of Central taxes and
increased expenditure commitment due to the implementation of the
recommendations of Pay Commissions, they largely continued to comply
with the FRBM targets.
Pay and Productivity
17.23 Wages and salaries constitute a
significant portion of the committed liabilities of both the Union and
States. Periodic revisions based on the recommendations of the Pay
Commissions of the Union, with States following suit, have contributed
to rising revenue expenditure. For States in particular, the fiscal
impact of a pay revision is severe, as the share of salary expenditure
in their total revenue expenditure is substantially larger than in the
case of the Union. Arrears in pay and bi-annual releases of Dearness
Allowance compound the burden.
17.24 Technically, the recommendations
of a Central Pay Commission are only for Central Government employees
and States are not bound to follow suit. Indeed, up to the 1980s, States
constituted their own Pay Commissions and prescribed their own pay
scales, based upon their fiscal capacity. However, since the Fifth
Central Pay Commission, salaries and allowances in States have tended to
converge with those in the Union Government and since the Sixth Central
Pay Commission, almost all States have adopted the Union pattern of pay
scales, albeit with modifications.
17.25 An internal study by the
Commission brought out the fact that the Union Government’s expenditure
on pay and allowances (including expenditure for the Union Territories)
[2 Excluding productivity linked bonus/ad-hoc bonus, honorarium and
encashment of earned leave, and travel allowances] more than doubled for
the period 2007-08 to 2012-13, from Rs. 46,230 crore to Rs. 1,08,071
crore [If salary of defence services is included, the corresponding
figures will be Rs. 73,073 crore and Rs. 1, 84,711 crore].
This increase can be largely attributed
to the implementation of the Sixth Central Pay Commission
recommendations, evident from the per employee annual salary (excluding
defence salary) increasing from Rs. 1,45,722 to Rs. 3,25,820 over this
period. Moreover, the share of expenditure on pay and allowances in
revenue expenditure (net of interest payment, pensions and grants-inaid)
increased from 11.8 per cent in 2007-08 to 13.1 per cent in 2012-13.
The incidence of salary expenditure is much higher in the States than in
the Union. In 2012-13, the share of expenditure on pays and allowances
of all employees in the revenue expenditure (net of interest payments
and pensions) among the States ranged from 28.9 per cent to 79.1 per
cent. Per employee (for regular employees) salary in 2012-13 across
States ranged between Rs. 2,12,854 and Rs. 5,49,345. Thus, the impact of
revisions in pay scales on fiscal positions is uniformly significant,
though it varies widely across States.
17.26 Given the variations across States
and the lack of knowledge about the probable design and quantum of
award of the Seventh Central Pay Commission, we believe that it is
neither feasible, nor practicable, to arrive at any reasonable forecast
of the impact of the pay revision on the Union Government or the States.
Further, any attempt to fix a number in this regard, within the ambit
of our recommendations, carries the unavoidable risk of raising undue
expectations.
17.27 Our concern is the likely impact
on overall budgetary resources, particularly of the States, once the
recommendations of the Seventh Central Pay Commission are announced and
adopted by the Union Government. All States have asked us to provide a
cushion for the pay revision likely during our award period. The Union
Government’s memorandum has built, in its forecast, the implications of a
pay increase from 2016-17 onwards. The recommendations of the Seventh
Central Pay Commission are likely to be made only by August 2015, and
unlike the previous Finance Commissions, we would not have the benefit
of having any material to base our assessments and projections and to
specifically take the impact into account. We have, therefore, adopted
the principle of overall sustainability based on past trends, which
should realistically capture the overall fiscal needs of the States.
17.28 In our view, on matters that
impact the finances of both the Union and States, policies ought to
evolve through consultations between the States and the Union. This is
especially relevant in the determination of pay and allowances, where a
part of the government itself, in the form of the employees, is a
stakeholder and influential in policy making. A national view, arrived
at through this process, will open avenues for the Union and States to
make collective efforts to raise the extra resources required by their
commitment to a pay revision. More importantly, it would enable the
Union and States to ensure that there is a viable and justifiable
relationship between the demands on fiscal resources on account of
salaries and contributions to output by employees commensurate with
expenditure incurred. In this regard, we reiterate the views of the
FC-XI for a consultative mechanism between the Union and States, through
a forum such as the Inter-State Council, to evolve a national policy
for salaries and emoluments.
17.29 Further,we would like to draw
attention to the importance of increasing the productivity of government
employees as a part of improving outputs, outcomes and overall quality
of services relatable to public expenditures. The Seventh Central Pay
Commission, has, inter alia, been tasked with making recommendations on
this aspect. Earlier Pay Commissions had also made several
recommendations to enhance productivity and improve public
administration. Productivity per employee can be raised through the
application of technology in public service delivery and in public
assets created. Raising the skills of employees through training and
capacity building also has a positive impact on productivity. The use of
appropriate technology and associated skill development require
incentives for employees to raise their individual productivities. A Pay
Commission’s first task, therefore, would be to identify the justify
mix of technology and skills for different categories of employees. The
next step would be to design suitable financial incentives linked to
measurable performance. We recommend the linking of pay with
productivity, with a simultaneous focus on technology, skills and
incentives. Further, we recommend that Pay Commissions be designated as
‘Pay and Productivity Commissions’,with a clear mandate to recommend
measures to improve ‘productivity of an employee’, in conjunction with
pay revisions. We urge that, in future, additional remuneration be
linked to increase in productivity.
Pensions
17.30 Pensions have been growing steadily, and the liability for pension
payments is likely to cast a very heavy burden on budgets in the coming
years. Some of the factors contributing to this growth are: (i) the
rise in pensions recommended by successive Pay Commissions; (ii) removal
of the distinction between people retiring at different points of time,
so that all pensioners are treated alike in their pension justifys;
(iii) taking over the liability for pensions of retired employees of
aided institutions and local bodies; and (iv) increasing longevity. The
New Pension Scheme (NPS), a contribution-based scheme introduced by the
Union Government in 2004 for all new recruits after the cut-off date,
has now been adopted by all States, with the exception of West Bengal
and Tripura. This scheme has the merit of transferring future
liabilities to the New Pension Fund and factoring the current liability
on a State’s contribution from its current revenues. We urge States
which have not adopted the New Pension Scheme so far to immediately
consider doing so for their new recruits in order to reduce their future
burden.
Conclusion: – The
recommendations of 14th Finance Commission are important for 7th Pay
Commission. As the recommendations of 14th FC is applicable with effect
from 01.04.2015 the impact of above mentioned recommendations will be
the part of 7th CPC. Need not to say that 7th CPC has the challenge to
prepare the report in stipulated time including the views of 14th FC.
Source Document: http://finmin.nic.in/14fincomm/14fcreng.pdf
