Column: Rationalise bureaucracy, then wages: Financial
Express
India needs a skill-based wage system of govt employees, not
a 1:12 ratio between lowest and highest paid ones
Why don’t governments learn from experience/mistakes; why
are they prisoners of precedent; why do vote bank considerations invariably
override national/economic interests? The government’s announcement of setting
up the Seventh Pay Commission throws up these very thoughts.
The government has
blindly followed the past practice of successive governments since 1947 when
the First Pay Commission was set up. The Indian economy has undergone a sea
change since then—structural transformation of the economy, technological
revolution, global integration, rising governance, skill and knowledge deficits
and, above all, transformation from a public-sector-led growth model to a
private-sector-led growth model. Should the wage policies for government
employees not capture these changes and address the challenges that we are
facing?
For an objective analysis of the government’s decision we need
to understand the political, fiscal, governance and economic dimensions.
Much has been commented upon on the timing of the
announcement and its political ramifications. Political leaders have lost no
time in claiming credit for the announcement to curry favour with their
perceived vote bank. Pay commissions, in the past, have been set up after every
10 years and the 10-year period after the Sixth Pay Commission would be over by
2015.
The hurry shown at this juncture needs to be contrasted with the thinking
in the NDA government in 2002-03 to delay the announcement because of the grave
fiscal situation facing the government. One can only wish that the alacrity
shown by the government to make this announcement were matched by similar
urgency in dealing with other problems facing the economy. I remember that in
1998 when the recommendations of the Fifth Pay Commission were being
considered, the then finance minister was opposed to the large pay-outs
involved without ensuring staff rationalisation and, as a protest, he went to
the extent of missing the Cabinet meeting in which the decision to accept the
recommendations was taken.
Given the impending elections it would perhaps have
been prudent that the government that seeks to reap the political benefits of the
decision should also be the government that has to deal with its fiscal and
economic consequences.
It is unfortunate that political expediency considerations
have prevailed over the government’s commitment towards fiscal consolidation.
The government’s five-year fiscal consolidation roadmap aims to bring down the
fiscal deficit in 2016-17 to 3% of GDP. How can one reconcile commitment to
rein in fiscal deficit with the large outgo that the Pay Commission
recommendations will entail? The central pay commissions also lay down a
benchmark for salaries and pensions for PSUs, state governments, universities,
aided institutions, cooperative societies and so on, who follow the same pay
structure without any consideration of their capacity to pay.
The huge consolidated
fiscal burden can only be at the cost of investment, poverty reduction and
growth.Having said that, it, nonetheless, needs to be appreciated
that expenditure of 12% of the budget on employee wage bill is not high by
global standards.
It is the skill mix, efficiency and productivity of the
employees that is a problem. Painting all categories of government
employees—whether they are scientists, teachers, doctors, defence and security
forces, generalists, railway employees, Group C and D staff—with one brush and
placing them in the ambit of a single pay commission creates enormous anomalies
and creates a premium on mediocrity over merit.
We need a skill-based wage
system of government employees instead of striving for an artificial ratio of
1:12 between the lowest and highest paid employee.
Many government reports, including that of the recent
Administrative Reforms Commission, have highlighted the various shortcomings of
our administrative structure. The large skill and knowledge deficit and
preponderance of an unskilled workforce is not suited to meet the challenges of
a diversifying and complex economy. Many ministries and agencies that were
needed in early stages of our development with a commanding roll for the public
sector have outlived their utility. At the same time, there are newer emerging
areas, especially in regulations for growth of a healthy private sector, which
require government’s focus.
The central government continues to have large
outfits in sectors which are state subjects leading to avoidable duplication,
inefficiencies and costs. The Expenditure Reforms Commission set up in 2000 had
given many useful suggestions for right sizing the government structure. A
thorough exercise to rationalise the bureaucracy should have preceded setting up
of a new pay commission. This subject should now form an integral part of the
commission’s Terms of Reference.
It is not that successive pay commissions have totally
side-stepped the non-fiscal governance-related issues. Governments have shown
promptness in accepting the pay-related recommendations but have generally
ignored other recommendations. For example, the 5th CPC had recommended
slashing of government employees by 30%, delayering the system by reducing
number of scales from 51 to 34; 6th CPC had proposed a liberal severance
package, corporatisation of Indian Railways, abolition of Indian telecom
service, reducing the number of government holidays to 3, rationalisation of
overtime and bonus policies. None of these recommendations have seen the light
of day.
There is another major economic consequence of the pay
commissions that has not got sufficient attention. Government employees
constitute not more than 5% of the total workforce in the economy. The 95%
workers outside the government sector are paid wages based on market
considerations and capacity of the employers to pay.
A large number of
government employees in the middle and lower rungs are drawing wages much
higher than their counterparts in the private sector and are also enjoying
benefits of job security and retirement benefits. Such a large mismatch in the
wage structure has the effect of spoiling the job market for the private
sector. Small businesses and self-employment ventures are unable to pay
salaries of R25,000-plus to drivers and R30,000-plus to office assistants etc.
As a result, rising public sector wage bill not only has adverse consequences
for the exchequer but also leads to queering the pitch for private businesses.
Governments need to factor in these economic consequences
while determining public sector wages. It can make a beginning by including
this item as one of the Terms of Reference for the Seventh Central Pay
Commission.
Having taken a populist decision to set up the pay
commission, the government should carefully craft its Terms of Reference so
that a more balanced view on wage policy for public employees is taken and pay
increases are used to leverage governance reforms.The author is former secretary, expenditure, and economic
affairs
