This week, Indians were informed that they will be paying more for the same old governance as the cost of running the government, mainly maintaining the lumbering bureaucracy, has gone up. The government announced the implementation of the recommendations of the Seventh Pay Commission. The new deal entailed salary hikes across the board. The entry-level wage has been raised from Rs 7,000 to Rs 18,000 per month—nearly twice India’s current per capita income. The cost: Rs 84,933 crore.
What India is waiting to be told is whether those paying the bill can expect a better/bigger bang for their buck. The recommendation for wage hike has been accepted. The government though is yet to reveal its view on “establishing standards of performance” and on “promoting people based on performance”. The crucial test of any deal—and the pay hike is a deal between those engaged to offer services and those paying with an expectation—must be about outcomes. The new deal for the employees is virtually silent on performance and delivery for the citizens.
It is estimated that the final bill will be around Rs 1,02,000 crore. Of course this is only the initial estimate. If the past is any indication, the bill will rise further in the future. The 14th Finance Commission reveals that after the implementation of the report of the Sixth Pay Commission, pay and allowances of Union government employees more than doubled from Rs 74,647 crore to Rs 166,792 crore between 2008 and 2012. The costs will expand once other affiliated parts of government—including the state governments—follow suit. A 2015 study by IIM Calcutta shows that pay and allowances rose from Rs 1,35,940 crore to Rs 3,23,760 crore between 2007 and 2012.
The long-term impact will be visible post the emergence of the complete picture. Every wage revision has in the past left in its wake debt and deficit. In 2011-12, states spent every second rupee in their revenue expenditure on salaries and pensions. Unsurprisingly, state governments have frequently cut productive investments to pay the wage bill. A 2008 study by Rakesh Mohan, former RBI Deputy Governor, shows that the ratio of capital outlays to GDP reached its lowest level between 1997 and 2003, both at the Centre and in the states.
The debate in the echo chambers has mostly been about the bang that the stimulus package will deliver for the economy. The sheer quantum of monies being released will catalyse consumption, drive demand, boost balance sheets and guide growth—an objective review of GDP data of the past two decades reveal bump-ups in growth post pay hikes for government employees. There is no such thing as free growth. The cascading effect of the new deal across states will show up on the inflation and deficit data.
You could argue that the money would have been better utilised on physical/social infrastructure, recapitalisation of banks, on enabling job creation. You could also argue the constituency of the organised has appropriated entitlements while the constituency of the needy awaits redemption. Yes, the arguments are valid, but have been overtaken by the decision. Ergo the question is: Does this pay hike ensure improvement in the delivery of public services? The crux is what does the taxpayer get out of this new deal.
India’s many failures are essentially deficits in governance. They are reflected in the poor human development indicators, in the challenges that daunt ease of doing business, in the torturous process of accessing services, in the delays and corruption that citizens suffer and live with. There is no denying that a large part of the bureaucracy is afflicted with issues of capacity, ability and integrity. Equally true is the fact that there are islands of unrewarded excellence amid this ocean of despair. The genesis of failures is located in the outdated architecture of governance and absence of a pay structure that can make a distinction between doers and others.
The necessity for performance orientation has been repeatedly stressed. The Second Administrative Reforms Commission averred that it’s a “pre-requisite for effective governance”. The 14th Finance Commission recommended “linking of pay with productivity” with a simultaneous focus on technology, skills and incentives. It also said pay commissions should be designated as ‘Pay and Productivity Commission’. The need for a performance-related pay structure figures in the reports of the Fifth, Sixth and Seventh Pay Commissions.
The Sixth Pay Commission even suggested guidelines—biometric systems for attendance/punctuality, incentives for cost savings on budgeted expenditure and measurement systems for individuals and departments. So what happened? Following the report of the Sixth Pay Commission, it was decided in 2010 that a Results Framework Document would be created. In 2016, the Seventh Pay Commission Report reveals, the process is yet to be put into place. That this formulation should take so long underlines the absence of outcome orientation and the urgent need for an overhaul of the appraisal and incentives system.
Undeniably, political will too has been lacking. The Fifth Pay Commission was accepted by the United Front Government and the consequences were borne by the Vajpayee regime. The Sixth Pay Commission was set up by the UPA. Manmohan Singh repeatedly invoked the mantra of administrative reforms through his 10-year tenure—even though neither the 15 reports of the Second ARC nor the recommendation for performance-related pay by the Sixth Pay Commission was taken on board. Indeed, between 1997 and 2016, successive regimes have successfully evaded the critical issue of performance orientation.
The debate is not about the hike per se—surely, government employees are entitled to context-appropriate remuneration. The point is not about the size of government either—relative to population, India will rank low on the size of the Leviathan. Minimum government is less about size and more about efficiency. At the core is a crying need for an alignment of expenditure and outcomes.
The Modi Sarkar came to power promising minimum government, maximum governance. It must walk the talk.
shankkar.aiyar@gmail.com