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Order Issued on Revised Pension for ex-servicemen

admin — Sat, 22 Oct 2016 10:06:24 +0000

Order Issued on Revised Pension for ex-servicemen.

The government has issued instructions for implementing the revised pensions for ex-servicemen under the 7th Pay Commission (SPC).

However, the issue of disability pension which had created considerable disappointment in the Services is not covered under this as it has been referred to the anomalies committee.

The government gazette notification on pensions was issued on October 18, defence sources told. This is a follow up action to the “resolution” dated September 30 issued by the Department of Ex-Servicemen Welfare.

The resolution had caused resentment from the veteran community as it had drastically lowered the disability pension for military personnel by converting the percentage based system to a fixed slab system.

Pending the conversion back to the percentage system it means that those retiring after January 1, 2016 would face a slash in their disability pension.

Source: The Hindu

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Why we must not grudge them a pay hike

admin — Thu, 26 Nov 2015 10:17:01 +0000

Why we must not grudge them a pay hike

In the heyday of Indian socialism, the perception of government was benign. In today’s climate of liberalisation, the government is viewed with hostility. That must explain the negative reaction both in the media and amongst the public at large to the increases in pay for Central government employees recommended by the Seventh Pay Commission (SPC).

The pay hikes are modest — embarrassingly so in comparison with pay increases and bonuses in the private sector. Yet, media reports talk of a ‘bonanza for babus’. The impact on the fiscal can be easily digested by the Indian economy. Yet, analysts warn of slippages in the fiscal deficit, a possible boost to inflation, and a setback to public investment. Do we want to run the government — which comprises not just civil servants but the police, armed forces, nurses, doctors, regulators and academics — at all? Or have we persuaded ourselves that all of the government is simply money down the drain?

Setting pay in government

The SPC’s figures don’t come out of nowhere. The Commission has a rigorous basis for setting pay in government. It arrives at a figure for minimum pay in government with reference to norms laid down by the 15th Indian Labour Conference (ILC) in 1957. The ILC had said that the minimum wage should cover the basic needs of a worker and his family, that is, a spouse, and two children who are below the age of 14. The SPC has spelt out the norms it has used for determining basic needs. It has gone by food requirements specified by a well-known nutritionist. To this are added provisions for clothing, fuel and lighting, education, recreation, festivities, medical expenses, and housing. There is an addition of 25 per cent to the total of the above to provide for the skill factor (the basic needs having been determined for an unskilled person). The SPC report provides detailed computations for each of these items. No reasonable person can accuse the SPC of being overgenerous.
Based on these norms, the SPC arrives at a minimum wage of Rs. 18,000 for a government employee. This is 2.57 times the minimum pay in the Sixth Pay Commission. The increase over the projected pay on the current basis as of January 1, 2016 is 14.3 per cent. This is the second lowest increase recommended by any Pay Commission since the first one, and it is way below the 54 per cent increase following the last one. The multiplication factor of 2.57 is used to arrive at pay for all levels of government except for a few at the top where a slightly higher multiple is used.

As before, pay at the lower levels of government is higher than in the private sector; at the top, the position is reversed. In today’s context, this may not be a bad thing at all. Pay in the private sector today is contributing towards massive inequalities in Indian society. Having a very different structure in government is a useful corrective to trends in the private sector. It will help contain tensions created by rising inequality.

Good news

So far as the impact on government finances is concerned, the SPC numbers provide a stream of good news. First, the impact of the pay hike on the Central government (including the railways) will amount to 0.65 per cent of GDP. This is less than the impact of 0.77 per cent of GDP on account of the Sixth Pay Commission.

Second, the impact on the Central government (excluding Railways), which is what matters when it comes to the Union budget, is 0.46 per cent of GDP. As some of the increase in salary comes back to the government as taxes, the impact, net of taxes, will be even less — say, 0.4 per cent of GDP (assuming an average tax rate of around 20 per cent on government pay). This is a strictly one-off impact. The correct way to view it, therefore, would be to amortise it over a period of, say, five years. The annual impact then is 0.08 per cent of GDP. The impact on the fiscal at the central level is barely noticeable.

Trends in the wage burden in the government are worth noting. Pay and allowances in the Central government have remained stable since 2010-11 at around 1.8-2.0 per cent of GDP. Thus, pay and allowances have been rising at roughly the same level as nominal GDP or 11-12 per cent. This is the increase after taking into account increments, adjustments for dearness allowance and promotions. In the private sector, such an increase would be considered laughable at all but the lowest level.

Pay, allowances and pension (PAP) as a proportion of government expenditure has been declining sharply. In 1998-99, PAP was 38 per cent of revenue expenditure. The SPC estimates that this figure has fallen to 18 per cent in 2015-16. (It will go up to 22 per cent in 2017-17 consequent to the SPC award, but will decline thereafter, as pay grows at a lower rate than government expenditure). The implication is striking: in financial terms, the workforce in government has been effectively downsized by nearly half over the past 17 years.

Pay in the private sector is contributing towards massive inequalities in society. Having a different structure in government will help contain tensions created by this inequality

Even in terms of numbers, India’s central bureaucracy (including the Railways but excluding the armed forces) has neither been increasing in recent years nor hugely bloated in absolute terms. The number of employees grew to a peak of 41.76 lakh in 1994. It has declined since to 38.9 lakh in 2014. Of the total, 13.8 lakh is accounted for by security-related entities (police and defence civilians). Railways and Post, which perform commercial functions, account for 15 lakh personnel. There are other commercial departments as well, such as Communications. Excluding security and commercial functions, the total central employment is just 4.18 lakh. “The ‘core’ of the government…”, the SPC report notes, “is actually very small…”

The SPC substantiates its point by comparing India’s Central government workforce with that of the federal government workforce in the U.S. In 2012, the non-postal civilian workforce in the U.S. was 21.3 lakh. In India, the corresponding figure in 2014 was 17.96 lakh. The number of personnel per lakh of population in India was 139 in 2014, way below the figure of 668 for the U.S. India’s bureaucracy needs not so much downsizing as right-sizing — we need more doctors, engineers, IT specialists, tax experts, judges, and so on.

The government is not bound by the SPC’s recommendations. It can opt for higher pay hikes as happened with the previous Pay Commission. Assuming the government goes along with the SPC, what impact on growth can we expect? Increased pay for government employees means greater government expenditure and hence a fiscal stimulus — provided government expenditure on other counts is not reduced and the fiscal deficit rises. This happened at the time of the Sixth Pay Commission. Higher wages for government employees contributed to a higher fiscal deficit and helped stimulate growth in the short run.

This time round, the Finance Ministry insists that it will stick to its fiscal deficit target for 2016-17 after providing for the SPC pay hike. If it does so, the reduction in fiscal deficit will be contractionary. Hence, the pay hike will not lead to economic expansion in the aggregate. However, greater income in the hands of government employees could favourably impact sectors such as the real estate, automobiles and consumer goods.

Source: TheHindu

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Seventh Pay Commission is no ogre: T.T. Ram Mohan

admin — Mon, 07 Sep 2015 04:43:14 +0000

Seventh Pay Commission is no ogre: T.T. Ram Mohan

The report of the Seventh Pay Commission (SPC) is set to be released soon. The new pay scales will be applicable to Central government employees with effect from January 2016. Many commentators ask whether we need periodic Pay Commissions that hand out wage increases across the board. They agonise over the havoc that will be wrought on government finances. They want the workforce to be downsized. They would like pay increases to be linked to productivity. These propositions deserve careful scrutiny. The reality is more nuanced.

Critics say we don’t need a Pay Commission every ten years because salaries in government are indexed to inflation. At the lower levels, pay in the government is higher than in the private sector. These criticisms overlook the fact that, at the top-level or what is called the ‘A Grade’, the government competes for the same pool of manpower as the private sector. So do public sector companies and public institutions — banks, public sector enterprises, Indian Institutes of Technology (IITs), Indian Institutes of Management (IIMs) and regulatory bodies — where pay levels are derived from pay in government.

The annual increment in the Central government is 3 per cent. Adding dearness allowance increases of around 5 per cent, we get an annual revision of 8 per cent. This is not good enough, because pay at the top in the private sector has increased exponentially in the post-liberalisation period.

Competition for talent

A correct comparison should, of course, be done on the basis of cost to the organisation. We need to add the market value of perquisites to salaries and compare them with packages in the private sector. We cannot and should not aim for parity with the private sector. We may settle for a certain fraction of pay but that fraction must be applied periodically if the public sector is not to lose out in the competition for talent.

True, pay scales at the lower levels of government are higher than those in the private sector. But that is unavoidable given the norm that the ratio of the minimum to maximum pay in government must be within an acceptable band. (The Sixth Pay Commission had set the ratio at 1:12). Higher pay at lower levels of government also reflects shortcomings in the private sector, such as hiring of contract labour and the lack of unionisation. They are not necessarily part of the ‘problem with government’.

Perhaps the strongest criticism of Pay Commission awards is that they play havoc with government finances. At the aggregate level, these concerns are somewhat exaggerated. Pay Commission awards typically tend to disrupt government finances for a couple of years. Thereafter, their impact is digested by the economy. Thus, pay, allowances and pension in Central government climbed from 1.9 per cent of GDP in 2001-02 to 2.3 per cent in 2009-10, following the award of the Sixth Pay Commission. By 2012-13, however, they had declined to 1.8 per cent of GDP.

This happened despite the fact that the government chose to make revisions in pay higher than those recommended by the Sixth Pay Commission.

Today, Central government pay and allowances amount to 1 per cent of GDP. State wages amount to another 4 per cent, making for a total of 5 per cent of GDP. The medium-term expenditure framework recently presented to Parliament looks at an increase in pay of 16 per cent for 2016-17 consequent to the Seventh Pay Commission award. That would amount to an increase of 0.8 per cent of GDP. This is a one-off impact. A more correct way to represent it would be to amortise it over, say, five years. Then, the annual impact on wages would be 0.16 per cent of GDP.

The medium-term fiscal policy statement presented along with the last budget indicates that pensions in 2016-17 would remain at the same level as in 2015-16, namely, 0.7 per cent of GDP. Thus, the cumulative impact of any award is hardly something that should give us insomnia.

There are a couple of riders to this. First, the government is committed to One Rank, One Pension for the armed forces. This would impose an as yet undefined burden on Central government finances. Second, while the aggregate macroeconomic impact may be bearable, the impact on particular States tends to be destabilising.

The Fourteenth Finance Commission (FFC) estimated that the share of pay and allowances in revenue expenditure of the States varied from 29 per cent to 79 per cent in 2012-13. The corresponding share at the Centre was only 13 per cent. The problem arises because since the time of the Fifth Pay Commission, there has been a trend towards convergence in pay scales. The FFC, therefore, recommended that the Centre should consult the States in drawing up a policy on government wages.

Downsizing needed?

It is often argued that periodic pay revisions would be alright if only the government could bring itself to downsize its workforce — by at least 10 to 15 per cent. From 2013 to 2016, the Central government workforce (excluding defence forces) is estimated to grow from 33.1 lakh to 35.5 lakh. Of the increase of 2.4 lakh, the police alone would account for an increase of 1.2 lakh or 50 per cent. What is required is not so much downsizing as right-sizing — we need more doctors, engineers and teachers.

Downsizing of a sort has happened. The Sixth Pay Commission estimated that the share of pay, allowances and pension of the Central government in revenue receipts came down from 38 per cent in 1998-99 to an average of 24 per cent in 2005-07. Based on the budget figures for 2015-16, this share appears to have declined further to 21 per cent. In financial terms, this amounts to a reduction of 17 percentage points over 17 years or an annual downsizing of 1 per cent. It’s a different matter that it is not downsizing through reduction in numbers of personnel.

It is often said that pay increases in government must be linked to productivity. We are told that this is where government and the private sector differ hugely. However, the notion that private sector pay is always linked to productivity is a myth. In his best-selling book, Capital in the 21st Century, economist Thomas Piketty argues that the explosion in CEO pay in the West has been increasingly divorced from performance. He also argues that the emergence of highly paid “supermanagers” is an important factor driving inequality in the West.

We are seeing a similar phenomenon in the private sector in India. The serious public policy challenge, therefore, is not so much to contain a rise in pay in the public sector as finding ways to rein in pay in the private sector. It is also ironical that people should harp on linking pay to performance in the public sector when high-profile firms in the private sector such as Google and Accenture are turning away from such measurement.

A better idea would be to conduct periodic management audits of government departments on parameters such as cost effectiveness, timeliness and customer satisfaction.

Improving service delivery in government is the key issue. Periodic pay revision and higher pay at lower levels of government relative to the private sector could help this cause provided these are accompanied by other initiatives. The macroeconomic impact is nowhere as severe as it is made out to be. (T.T. Ram Mohan is professor at IIM, Ahmedabad)

Read at: The Hindu

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