It may have to deal with the issue of one-post, one-pay

Updated: Jul 31 2006, 05:30am hrs
The announcement for the setting up of the Sixth Pay Commission (SPC), though eagerly awaited by a few million government employees, is also perceived as an ominous signal by several researchers and commentators on public finance. The award following the Fifth Pay Commission (FPC) recommendations and the subsequent accession by most state governments, has often been flogged as one of the principal reasons for the debilitating impact on the fiscal sustainability of the Central and state government establishments. Quite often though, this has been misused as a convenient excuse both by the governments and researchers.

At the macroeconomic level, however, such commissions provide the opportunity to debate upon the desirable size and composition of the government establishment and the level of the wage price in the cost of service rendered by it. In economic terms, this is equivalent to a technological choice for the labour component (in the production of government services) and the corresponding factor income (wages).

As per Budget documents, in the seven years between 1996-97 and 2003-04, the strength of the Central government civilian establishment has declined at the rate of 1.4% per annum from its 1996-97 level of 3.8 million to 3.5 million in 2003-04. The total compensation has grown at a nominal rate of 8.2% per annum. But adjusting for the decline in employment, the average wage cost has risen at 9.8% per annum (approximately Rs one lakh, in 2003-04).

The average annual real increase in basic pay as envisaged in the FPC varies between 2.1 and 2.7% for different groups. In comparison, over the same period the nominal GDP at factor costs (that excludes net indirect taxes) has grown annually at 10.6% per annum, while the real (at 1993-94 prices) GDP at factor costs has grown at 5.7% per annum. It is clear that the average compensation of a Central government employee has grown at a rate lower than the average for the Indian economy (average though, may not be the most appropriate measure of central tendency).

Current remuneration, however, is only a part of the compensation, as government employees are also entitled to deferred payment in the form of pensions. Crude estimates suggest that for an individual, the deferred component constitutes more than one-third of the total life-time compensation. If one includes medical benefits, then perhaps the deferred component may be nearer one-half.

In contrast to the former defined benefit (DB) pension plan, new recruits in government service, from January 1, 2004, are members of a defined contribution (DC) pension plan. Under the DC plan, individuals mandatorily contribute 10% of their pay, matched by an equal contribution by the government, into an individual retirement account (IRA). This individual contribution lowers the net present remuneration of new recruits as compared to those already in service before January 1, 2004. Moreover, in the extant form, the deferred remuneration of the new recruits is inadequately assured. This appears to be an ingenious strategy to reduce the wage costs of government service; but whether it retains the incentive to attract merit and motivate ethical integrity appears questionable. The earlier maxim of one-post, one-pay appears to be grossly violated and the SPC may have to deal squarely with this issue.

Keeping wages depressed cannot be presumed to translate into lower costs of government service, or as an indicator of efficiency and productivity. It is, perhaps, also inappropriate to draw parallels between the differentials in the private and public sector, as guideposts for the commission. Governments have a responsibility to ensure not only sufficient opportunity for decent work, but also sufficient financial capacity for decent living. While governments in developing economies cannot be perceived to foster wide inequalities, care must be taken so that there is sufficient incentive not to allow any dilution in the hierarchical relationships for smooth functioning of the government machinery.

The writer is a senior economist with the National Institute of Public Finance and Policy (NIPFP). These are his personal views