If all goes to plan, the Cabinet will approve the Seventh Pay Commission’s whopping 24% hike in salaries on Wednesday for close to 5 million employees and an equal amount of pensioners and, if all is given out this year, that’s an additional R1-lakh-crore stimulus or around 0.7% of GDP. Since this will also have to be given for teachers and PSU and state government employees, that will ensure a regular dose of stimulus for the next few years. Chambers of commerce will cheer it, markets will bounce back and little will be done to address the real issue of too many clerks in the government and too few officers which is the primary reason for service quality being so poor despite India’s large bureaucracy. In the end, since pay commissions are really about balancing the maximum demands of the bureaucracy with the minimum needed to keep it from revolting, the issue of fixing the head-to-tail ratio and implementing performance-linked-pay will be cursorily mentioned by the Eighth Pay Commission, and then the Ninth…
No attempt, similarly, will be made to fix the issue of salaries. Even after their very generous pensions —which are adjusted for inflation every quarter and hiked dramatically every decade—top bureaucrats typically get paid much less compared to the private sector while the legion of peons, drivers, secretaries and teachers get paid 3-4 times as much; and with little pressure on performance, deliver very little. A government school teacher, before the pay panel award, with no experience gets paid R52,000 as compared to a mere R19,000 (at the top end) in the private sector; a fresh government nurse gets 3.4 times her private sector counterpart, a driver 1.8-2 times. It pays a lot more to be a doctor in a government hospital if you’re an MBBS but as the skill levels rise—to an MD or an MS—private jobs pay much more.
As for the impact, as Kotak Institutional Equities points out, things are quite different from the last pay panel report in 2008. Halving of excise duties—from 16% to 8% between February 2008 and 2009—ensured automobile prices were dropped significantly, a 425 bps cut in the policy rate in a span of just seven months made money much cheaper. The rural economy was also in far better shape, thanks to big hikes in MSPs, and with private sector investment peaking that year, overall sentiment was buoyant. Even so, a R1-lakh-crore stimulus will help, though this will have to be balanced by lower spending elsewhere. While that will play out as it will, the important question to ask when the Cabinet clears the pay panel award, is when the larger issues of right-sizing—and right-paying—the bureaucracy will happen.
