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Wednesday, April 2, 2008

Pay Commission hike is only 13%

Media reports have talked of a ‘bonanza for babus’ in the shape of a 40% hike recommended by the Sixth Pay Commission (SPC). Many wonder whether government servants deserve such munificence. It is nothing of the kind. The pay hike recommended by the SPC is modest.

The correct way to estimate the average pay hike for central government servants is to see how much the government’s wage bill goes up. The SPC estimates the annual gross impact of its recommendations to be Rs 9,242 crore for the Union government (excluding the Railways). Pay, allowances and pension of the Union government amounted to Rs 68,290 crore in 2007-08. Hence the average increase in government compensation is 13.5%.

The increase at the highest level — Grade A — is much larger, around 30-40%. But grade A officers account for just 1% of the total strength of government employees, so the increases at the highest levels have little impact on average compensation. The increase in compensation for the vast majority of government servants will be in the range of 10-13%. Hardly the ‘bonanza’ the media has gone to town about.

Nobody needs to lose sleep over the fiscal impact of the SPC. The annual impact (including the Railways) amounts to Rs 12,561 crore. (This does not take into account possible savings of around Rs 4,600 crore). Arrears amounting to Rs 18,060 crore are to be paid over two years or about Rs 9,000 crore each year.

The fiscal impact on the Centre in 2008-09 is thus around Rs 21,000 crore — or about 0.4% of GDP. This will taper off and become negligible over the next three years or so. The impact on the states is not likely to exceed 0.5% of GDP either.

Compensation in central government as a proportion of revenue receipts has been falling over the years. It rose from 28% in 1996-97 to 38% in 1998-99 following the Fifth Pay Commission (FPC). It declined thereafter to an average of 24% in the period 2005-07. The decline of 14 percentage points in the ratio over the past decade means that government has effectively been downsized by over a third, as the FPC had recommended. It may not be downsizing by asking people to leave. But, in financial terms, it is indeed downsizing.

The SPC recommends annual increments of 2.5%. Add dearness allowance growth at 4.5%. Add another 2.5% towards increase in manpower. That gives us growth in compensation of 9.5%. Revenue receipts are growing at 17%. So the ratio of compensation to revenue will continue to decline in the years to come.

The SPC could have set a threshold for the compensation to revenue ratio. Once the ratio falls below the threshold by, say, 3%, that could be the trigger for an increase in compensation that would take the ratio back to the threshold. This would have ensured that wage revisions in government take place sooner than 10 years and contained the demoralisation in government created by runaway growth in private sector compensation.

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