The burden of pay hike

By Praveen Raman
In Issue 3
December 11, 2015
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Are pay commissions doles best use of govt’s resources?

paycommissionThe much anticipated report of the Seventh Pay Commission is out. The report, submitted to the Union Finance Minister Arun Jaitley on November 20, by the commission chief Justice AK Mathur, has recommended an overall increase of 23.55 per cent in pay, allowances, and pension for government employees. Within this, the commission’s report recommends a 16 per cent increase in basic pay, a 63 per cent increase in allowances and a 24 per cent hike in pension. The recommendations are to come into force on January 1, 2016.

This recommendation will impact 47 lakh employees and 52 lakh pensioners. The total monetary impact on the central government would be a whopping Rs 1.02 lakh crore. Around Rs 74,000 crore would be the impact on the Union Budget and Rs 28,000 crore on the Railway Budget. The impact of the recommendations amounts to 0.6 per cent of GDP.

It is because of regular pay revision and stability, the government jobs are much sought after in our country. When more than 2.3 million people rushed to apply for just 368 positions for the job of a peon in the Uttar Pradesh government recently, including some with professional qualifications, it reinforced the idea that how coveted the government service are. While it is correct that the economy has not been able to generate enough quality jobs for a growing workforce, it is also true that the government offers much higher wages, as well as perks, that are not available in most cases in the private sector. The rush to apply for government jobs is thus more a reflection of a massive wage premium at the lower levels of the labour market than sluggish job creation.

No doubt the commission’s recommendation has brought joy to the government employees and pensioners, but it may be a time for the rest of us to look this joy. Going back a bit, the Fourteenth Finance Commission estimates had said that the cost of the Sixth Pay Commission was over Rs 90,000 crore annually to the national exchequer, since pay and allowances of Union government employees more than doubled between 2007-08 and 2011-12. Now, compare this dole to the estimates in the economic survey for the same year, about Rs 70,000 crore each for food subsidy, fertilizer and petroleum subsidy. Simply put, the additional Central government expenditure due to the implementation of the Sixth Pay Commission was over 40 per cent of the major subsidies. If we take into account the costs to the State governments, the tab for Sixth Pay Commission largesse is probably equivalent to all the subsidies provided by the Central government taken together.

As the recommendation came from another pay commission-mandated salary hike, it is important to look whether this make an economic sense. It is not only the question whether the government can afford it but if it is the best use of government resources. Government employees receive Dearness Allowance (DA) annually to compensate for inflation. They also receive an annual performance appraisal for promotions, which brings with it salary increases. So the decadal salary increases under the Central Pay Commission (CPC) are meant to address inequities in salaries across different parts of the government, across ranks as well as between the public sector and private sector. It is the latter that has provided the greatest justification for salary increases granted under CPC in the past.

The big buck salaries of the premier management institutes of India, like IIMs and IITs, funnel a sense of discontent among public sector employees since it is hard to imagine any 25-year-old government servant receiving a package of Rs 40 lakh per annum. This forms basis of several observations made by the previous pay commissions. First, it noted that the contention of vast disparities between private sector and government employees was not borne out by data. The CPC found that compensation to Group C and D employees in government was higher than that in the private sector; for Group B it was similar and only for Group A was it lower. Group A employees form less than 5 per cent of the total Central government workforce; Group C and D are about 90 per cent. Second, it noted that a government job offers many other benefits not available in the private sector and the fear of flight away from public service towards the private sector is overblown.

Even with these observations, the recommendations of the last CPC led to substantial increases in the salary and allowance of all public servants, both central and states. A comparison of incomes between private sector employees and government employees using data from India Human Development Surveys (IHDS) of 2004-05 and 2011-12 is instructive in understanding the consequences of the last CPC. The graphic shows monthly salaries for men aged 25-59 in 2011-12. Many women work part time as anganwadi workers and ASHA workers and hence are excluded from this comparison, but their inclusion will not change the fundamental results.

The results show that at every single level of education, government workers are paid more than private sector workers and more importantly, the public service advantage has increased rather than decreased after the implementation of the last pay commission recommendations. A driver in government service earns far more than one in private service, and so does an engineer. This comparison does not include the other benefits government service provides including employees provident fund contributions, housing benefits, health insurance and, frequently, admission of children to coveted Kendriya Vidyalayas.

One might say that the problem is not across categories, but is concentrated in highly skilled positions. Individuals who are highly skilled may be more likely to choose the private sector.

Here only the Union Public Service Commission can tell us if the qualification of the entering cohort of the coveted Indian Administrative Service officers is declining, but at a slightly lower stratospheric level, we see no such evidence. The IHDS shows that among college graduates with a first class degree, government service still seems to be preferred. In 2004-05, among the male college graduates employed in public service, 37 per cent had a first division; this proportion had increased to 39 per cent by 2011-12.

This is not to say that skill upgradation is not taking place in the private sector, where the proportion of first class degree holders among graduates has increased from 28 per cent to 35 per cent, but these figures do not suggest that government services are suffering on an average; just that the more qualified individuals are seeking salaried work and moving away from farming and small businesses benefitting both government service and the private sector. In this situation, there is surely a careful and incisive analysis required to justify the massive rise in the government officials’ salaries through 7th pay commission. It also should act as the process of deciding further rounds of pay hikes.

Simultaneously, the government needs to assess the massive chasm that its actions open between private sector which provides most of the jobs, and the government sector which provides a very small fraction of jobs but still manages to perhaps push up inflation.