Though the announcement of the 7th central pay commission does look awfully like a pre-election stunt aimed at getting around 10 million?direct and indirect?government employees to feel good about the ruling coalition, it is actually a sensible move. A Pay Commission is implemented every decade, the next one in 2016?so, given it takes around 2 years for a Pay Commission report to be completed, it needed to be constituted around now. Indeed, more than the actual pay hikes, in the past, it has been the arrears that have posed a fiscal problem?so if the Commission gives its report in 2015 and a decision is taken quickly, it can be implemented from January 1, 2016, as the prime minister has announced, which means there will be no payment of arrears. In the case of the 6th Pay Commission, for instance, while the annual impact was R15,000 crore, the arrears amounted to R28,000 crore?despite the arrears being paid in two instalments,the fiscal deficit rose to 6%in FY09 and 6.5% in FY10. In the case of the 5th Pay Commission, the extremely generous award along with the usual arrears resulted in expenditure on this account rising by 67% between FY97 and FY00.
While comparisons are always made with private sector pay, this shouldn?t really be done since the two salary structures are very different, apart from the complete job security of government jobs. For a common sample of 1,586 firms, employee costs rose 6.9 times between FY03 and FY13?this rose around 3.9 times for the central government and 3.0 times for state government employees. The difference, however, lies in the very generous pensions government employees get as compared to none for private sector employees?though this does not apply to new government employees since 2004 when the NPS replaced the older pension scheme, pension outgo for central government employees rose 294% between FY97 and FY07, no doubt bumped up considerably as a result of the 5th Pay Commission.
In the event, at a macro level it may be possible to say the government is compensating employees adequately, but the 7th Pay Commission needs to, like its predecessors, look at the head-to-tail ratio?the government has too few secretaries and too many peons, the former is still under-paid and the latter highly over-paid. Government data shows the government spends around 13% of its salary bill on gazetted officers and the rest on the non-gazetted ones. Apart from correcting this, perhaps with a VRS and certainly by freezing salaries at this level, there is little point in hiking salaries unless attention is paid to the work done by bureaucrats. If over R7.5 lakh crore of projects are stuck on account of clearances not coming through, or if the ultra-aggressive taxman is driving investors away, even the money bureaucrats are being paid right now is excessive.
