The Hindu Business Line : Sixth Pay Commission — Ensure efficiency before hiking salaries

From what the upcoming Sixth Pay Commission stipulates, Dr Manmohan Singh wants to use savings of the citizens and inflows from foreign investment to pay higher salaries to government employees. Wouldn't it be better if the government used the money from these two sources to lower tax rates or provide relief, instead?

THE Prime Minister, Dr Manmohan Singh, has announced the Government's intention to constitute the Sixth Pay Commission soon. The question is: What is the right wage for government servants?

According to the World Bank, the average salary of a government employee in England in 1995-2000 was £19,000 a year. The average income of the British citizen was £13,500. The income of the government employee was 1.4 times the average income of the British citizen. The ratio in some other countries was as follows: Indonesia 1.0, China 1.2, United States 1.4, Korea 1.5, Argentina 1.9, Singapore 2.9 and Malaysia 2.9.

In comparison, the average income of the government employee in India was Rs 75,000 per annum against the average income of the Indian citizen of Rs 15,600. The ratio was 4.8 times — the highest among these countries. Further, there was a decline in the ratio in Indonesia, Argentina and Korea between 1995 and 2000 while it remained unchanged in China, England, Malaysia and the US.

Globally, it seems, the intention is to reduce the pay package of government employees. Not so in India! The ratio has increased from 3.6 to 4.8 in the same period. And it becomes even more skewed if corruption is taken into account.

According to reports, the government's current wage bill stands at Rs 37,000 crore,which means that a government employee's salary is 4.8 times the income of the citizen. In a recent article in Business Line, Prof R. Vaidyanathan of IIM Bangalore estimated rent seeking by government servants at Rs 1,53,910 crore. If this is added to their salaries, then it shoots to over 25 times the income of the average citizen. In the light of this, do government employees really deserve a wage hike?

The impact of the Fifth Pay Commission on the economy was disastrous. This was one of the reasons for the low rate of growth during the NDA government. Reportedly, a committee headed by Cabinet Secretary, Mr B. K. Chaturvedi, had last June turned down a request for constituting a Sixth Pay Commission saying that the Centre may not be able to bear the additional burden.

In fact, in their representation to the Twelfth Finance Commission, West Bengal, Bihar, Orissa, Assam, Manipur, Meghalaya and Mizoram had sought a mechanism to ensure that the Centre could not announce any pay revision without consulting the States. It appears that the Prime Minister had anticipated this objection. While declaring the government's intention to constitute the Commission he said: "The fiscal situation has improved in the last 20 months. States are flush with cash. If we accelerate the pace of economic growth, things will improve further."

This optimism, it seems, is misplaced. Mr Paul Rawkins, Senior Director at Fitch Sovereign Ratings points out that the finances of the Government have, in fact, deteriorated. The impact of this is as yet to be felt because of a parallel increase in household savings. He points out that higher growth in India is becoming increasingly dependent on external financing. In other words, Dr Manmohan Singh wants to use savings of the citizens and inflows from foreign investment to pay higher salaries to government employees. Wouldn't it be better if the government used the money from these two sources to lower tax rates or provide relief, instead?

One of the first statements made by Dr Manmohan Singh after he assumed office as Prime Minister was regarding the need to reinvent the government. That was indeed commendable.

It is unfortunate that one has not heard more from him on that score in the last 20 months. The assurance of the Sixth Pay Commission to look into issues of right-sizing the government, efficiency and administrative reforms is, therefore, welcome. But going by experience, creating efficiency in government functioning is fraught with difficulty.

An OECD study titled `Paying for Performance: Policies for Government Employees' points out that, in the United States, efforts to link pay to performance of government employees has not been successful because 95 per cent of the managers were rated as `fully satisfactory or better'.

In Canada, Germany, Korea, Switzerland, the UK and the US, there is the increasing use of forced ranking systems. Employees are forced to mark a specified proportion of employees in the higher and lower categories of the rating scale. In fact, the OECD study warns that trying to bring efficiency into government can backfire. It says paying-for-performance `policies are counterproductive in an inadequate management framework, and even lead to corruption and patronage.'

Clearly, it is an uphill task to reform any government, especially in India where the `management framework' is far worse. By the looks of things, government employees will be given yet another salary rise in the Sixth Pay Commission which will be nominally constituted under the cover of `efficiency'— exactly as was done with the Fifth Pay Commission. It was suggested that the bureaucracy be downsized by 30 per cent over a ten-year period. This can be achieved, the Fifth Pay Commission had said, by compulsory retirement of those who were found to be incompetent or corrupt. It had also recommended that there be a quinquennial assessment of Group `A' officers.

Remarks about integrity would be allowed in such periodical reviews by a knowledgeable group and could lead to compulsory premature retirement of the officer. Further, the Commission had said, "What we require is online monitoring of performance, performance budgeting, performance audit, concurrent evaluation, continuous counselling and feedback at all levels."

The Commission had explicitly stated that its recommendations regarding pay hike should be seen as a single undertaking along with improvements in efficiency. But the recommendations regarding efficiency were ignored while those concerning the pay hike were heeded.

There is a great danger that the Sixth Pay Commission will go the way of its predecessor. It would be better for Dr Manmohan Singh to constitute the Sixth Pay Commission in two stages to avoid recurrence of such oversight.

Initially, an `Efficiency Commission' may be constituted and only after its recommendations are implemented should the Pay Commission be set up.

(The author, an economist, is a New Delhi-based freelance writer.)

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