The need to do away with pay commissions

Yet again, there is a Pay Commission award for Central government employees; yet again, the cries of stress on the public finances; and yet again, the same expression of discontent on the faces of most of the beneficiaries. One is at a loss to comprehend who actually has benefited from this humungous exercise.

Pay panels are periodically constituted to go into various issues of salary structure, retirement benefits and other service conditions of Central government employees and to make recommendations on the changes required. Ever since independence, such a commission has been set up roughly after a gap every 10 years, meaning thereby that the emoluments of Central government employees are reviewed only once in 10 years.

This imposes a burden of finances on the exchequer. Two-to-three years subsequent to the pay panel, payouts are stressful for government finances. The last (sixth) pay commission came in 2008. In the year 2009 and 2010, the gap between expenditures and revenues of the Central government increased to the tune of six per cent because the arrears were paid to the employees for 30 months.

This year, the saving grace for the exchequer is that the Seventh Pay Commission award is prospective, unlike the fifth and sixth which came with heavy arrears. Still, concerns have started emerging about the fallout of more than Rs 1 lakh crore to be incurred in one year alone on salaries, allowances and pensions of close to 85 lakh people (33 lakh employees and 52 lakh pensioners).

Rating agencies and brokerages have raised doubts on the capability of the government to meet its deficit targets. Economists are crying hoarse that such a large payout will give rise to consumption-led growth at a time when India needs investment-led booster. Automobile companies are not very sanguine about a bumper sale because they fear that in the absence of arrears, the employees will not be left with much disposable income in their hands to spend on capital expenditures.

The employees are disappointed because they see very little increase after the pay scale has been adjusted for inflation in the past 10 years. The employer, in this ca-se the government, says it will have to incur an extra Rs 1.02 lakh crore in the coming financial year. Whose gain is it anyway?

The fine print of the Commission report comes with an answer the government must pay some heed to. It has suggested the government to review periodically the salaries, emoluments and pensions of its employees without waiting for the long period of 10 years. The revision can be done on the basis of the formula which takes into consideration the change in prices of the commodities that constitute a common man’s basket. The Labour Bureau at Shimla reviews this basket periodically.

On the lines of Australia and New Zealand, India too can have a permanent Remuneration Authority that can review the pay structure based on job roles evaluation, remuneration prevailing in the market for comparable job profiles, general working of the economy within a given budgetary outlay etc.

With this, the pay structure could be revised periodically, at more regular intervals, say annually, without putting an undue burden on the public exchequer every decade, as is the case now.

The panel suggests that such a periodic review can easily be absorbed in each year’s budget and will also lead to greater employee satisfaction. This will also save the government from doing the biannual revision of dearness allowance (DA) as it is done at present.

The government earns its finances from collecting tax and non-tax revenues and borrowings. But it is hard to digest that every second rupee that the Centre collects as tax revenue goes to the payment of salaries and pension.

Performance criterion
The Commission has suggested to the government an immediate need to introduce performance-related pay structure and increment, and linking of bonus to productivity of an employee. There is a widespread perception that increments as well as upward movement in the hierarchy happen as a matter of course.

On the contrary, the Commission has recommended that employees who do not meet the laid down performance criterion should not be allowed to earn future annual increments.

In the same vein, it has also suggested withholding of annual increments in the case of those employees who are not able to meet the benchmark for a regular promotion within the first 20 years of their service. This will act as a deterrent for complacent and inefficient employees.

In India, where public sector employees are being paid salaries even after their plants being closed, the hard hitting suggestions of the panel may be difficult for the government to digest.

Soon after accepting the Commission report, Finance Minister Arun Jaitley said the government would take the recommendations into consideration. In favour of government finances and the long term benefit of Indian economy, the government should examine a practical suggestion to do away with the pay commission itself.

The Commission award has another fallout. It is also expected to lift the sagging rural demand, if supported by a good monsoon. In due course, the states will also implement wage hikes by a one or two year delay as in the past. This will give another booster to the consumption demand.

Nothing comes free. There will be adverse fiscal and inflationary implications of this payout. At a time when the government needs a lot of investment in infrastructure, power and housing sectors, such consumption boom will only delay the economic revival.