No Sour Grapes Please: Financial Express: 28th March 2008

The Pay Commission’s recommendations for a general increase in the pay packages of government officials needs to be welcomed for five good reasons. The first is that it comes after a lag of about 10 years, during which time the cost of living has risen substantially—at an average of 6-7% per annum based on the CPI. Private sector employees see a big increase in their pay packages every year. The average increase of 40% for state employees is quite modest at just 4% per annum, which when discounted by 10 years would be even lower.
The second reason is that all such pay increases add to the purchasing power of people and help to stimulate demand. While there are roughly 4.5 million central government employees directly covered (which means around 20 million people), the same would also apply to varying extents to the state government staff. The growth momentum can never be sustained by merely providing more purchasing power to the same set of people, which has been the case in recent years with the private sector cornering most of the gains of rapid economic growth. Broadening is a must.
The third reason is related to the second. By increasing the purchasing power of a large segment of the middle class, we are actually reducing the disparity between the rich and the not-so-rich. This helps in upward social and economic mobility.
Fourthly, by reducing income disparities between the private and public sector, responsibilities are matched better with compensation. After all, the CEO of a public sector enterprise or civil servant who has 1,000 people reporting to her should be paid equivalently.
Lastly, by raising salaries even at clerical levels and for policemen, the level of corruption in the government will come down at the margin, even allowing for habitual corruption.
Now let us look at the criticisms that have been levelled against the report. The first line of attack has been that it offers a carrot but not a stick. But, if one looks at the private sector and juxtaposes this with what is being debated in the aftermath of the subprime crisis, a different picture emerges. Does the same apply to the private sector in India or elsewhere too? In the financial sector, for example, it has been seen that CEOs often get their rewards in the form of exaggerated bonuses and stock options when business goes up. When the chips are down, bonuses are never negative, and they do not even get the pink slip. The Pay Commission has been transparent with pay packages, unlike the translucent rewards system in the private sector. In fact, in owner-driven Companies, things are even more opaque.
The other concern has been the fiscal deficit. The private sector tends to look at the Budget as a corporate P&L. But this should not be the case. The government needs to carry out certain programmes and needs staff to implement the same. Therefore, ideally these essential expenses should be removed from the Budget or treated separately so that interest payments, subsidies and so on come after the net income of the government is calculated—analogous to the concept of EBDIT in corporate parlance. If this is done, then a more balanced view can be taken of the impact of this pay hike on the fiscal deficit.
There are, however, some issues that could have been addressed by the Pay Commission. The first relates to retirement age. Very often, senior civil servants retire but return in the form of consultants and carry on till the age of 70, if not more. This should have been capped. More could also have been done to retain talent fleeing to private sector prospects. Or else, the government may still be left holding only the “lemons”. .