Coffers deplete as take-homes go up

Written by Surabhi Rastogi | Surabhi | Updated: Mar 30 2008, 04:34am hrs
One event, different people, varying perspectives, converse reactions. A classic example of this would be the report of the Sixth Pay Commission submitted to the finance ministry last Monday. The report, which has suggested a 35% to 50% salary hike for most government employees, received mixed responses. While the steel framework of the Indian administration the 5.4 million government employees have welcomed it, others like workers in public sector enterprises and banks have demanded similar salary increases.

The stock markets, which had been nose-diving like never before, reversed their trends at least temporarily. The Bombay Stock Exchange Sensex posted its second highest intra-day gain of 928 points a day after the recommendations were submitted, partly in response to the report and partly in response to other global developments.

Economists and economy watchers on the other hand are of the view that if the handsome pay hikes are implemented blindly, it may just derail the process of Indias fiscal consolidation. They advocate that what is more necessary is the introduction of the plethora of reforms such as performance linked incentives that have been suggested by the commission headed by justice BN Srikrishna. Increased inflationary pressures on account of larger disposable incomes are also a probability. Inflation, which is at a nine-month high of 5.92%, will certainly rise. As an additional secretary rank officer who estimates a 47% rise in his salary to about Rs 97,600 a month inclusive of all allowances pointed out, The effect of the pay hike will be largely offset by a proportionate increase in prices of commodities and services. I really dont think well be much better off.

Lets take a quick look at the figures involved. The proposed hike in salaries is expected to increase the governments gross wage bill by Rs 12,561 crore in 2008-09. The Centre will also have to shell out Rs 18,060 crore as arrears over a two-year period. Other recommended reforms are likely to help the Centre cut down its wage bill by Rs 4,856 crore anually.

The set-off by these savings may mean that eventually the Centres net additional financial implication would amount to Rs 7,975 crore annually. But the Commission has warned that in 2008-09, there would be no such savings as the other reforms advocated by it would take time to kick in. This is quite less than the staggering Rs 17,000 crore cost due to the recommendations of the Fifth Pay Commission. Where the money will come from to foot this wage bill is still uncertain. Finance minister P Chidambaram in Budget 2008-09 has not earmarked any funds for this as he felt there is enough headroom for such adjustments. He would also request the Thirteenth Finance Commission to suggest a suitably revised fiscal roadmap based on the recommendations. DK Joshi, principal economist, Crisil said, If we assume that there would be some savings and the government pays the arrears at one go, the fiscal deficit may rise by about 0.5% of the GDP to 3% of the GDP in 2008-09. But the governments finances are much better. So the recommendations will definitely put pressure on government finances but may not derail it, he added.

The improved salaries would act as a benchmark for salaries of state governments, PSUs, nationalised banks and municipal bodies. A proportionate hike in their pays and wages would also be expected. After the Centre implemented the Fifth Pay Commissions recommendations in 1999, states had to follow suit. Their wage bill increased by almost 74% and in fact 13 states did not have the funds to pay salaries of their employees in 2000.

In this scenario, the governments obligations for reducing fiscal and revenue deficit are likely to go for a toss. Experts feel that the extent of the impact in the governments fiscal will depend on how the proposals are implemented. DK Srivastava, director, Madras School of Economics said, The Centre will certainly miss its fiscal deficit and revenue deficit targets for 2008-09. But by what quantum will depend on the governments response to recommendations on pension rather than pay.

The burden on states, which have followed a very relaxed recruitment policy on account of the pension recommendations, will also be huge, he said, adding that they too will reverse their trends for being revenue surplus. Many states would go back to being revenue deficit, he pointed out.

The Commission has called for over 40% rise in the pension of civilian employees and 60% for the armed forces.

Many feel inflation is not only a cause but is also a reason behind the recommendations. A peon in a government ministry said, They talk about a pay hike. What is there to rejoice in it Have you seen the prices of vegetables in the market lately Srivastava too said that inflationary pressures would certainly set in. A rise in revenue deficit of both the Centre and the states will lead to a reduction in savings and an upward pressure on interest rates. This in the long term within a year would push up costs, he said. In the short term, there will also be some inflation from the demand side, with higher money supply. Economic growth too may get constrained, he cautioned.

But the governments intention in implementing the recommendations is clear. With elections only a year away, not only will it help the UPA garner votes, but it will also help attract some of the countrys finest talent for filling up administrative posts. After all someone correctly said, If you pay peanuts, you get only monkeys!