A flawed logic

There has been a spate of commentaries on how beneficial the Seventh Pay Commission-mandated pay hikes, now approved by the Centre with retrospective effect, will help the economy. Others cheered this with comments like “you pay peanuts, you get monkeys!” The metaphor is unfortunate, but illogical, as the “monkeys” are already in place, only now the diet has become a lot richer.

The high cost of wages has also slowed the intake into the government and most departments are badly understaffed. For instance, that revenue-collecting departments are short of staff by as much as 45.45 per cent, health by 27.59 per cent, railways by 15.15 per cent, while the home ministry is understaffed by only 7.2 per cent speaks volumes about what has gone wrong in our system. We have a saying that the government’s main business is to collect taxes so that it can be spent to benefit the people. But we see that the government’s main business is now its least concern.

The sheer absurdity of the logic that higher government salaries are beneficial to the economy speaks volumes of the kind of stupidity that permeates our policy thinking in high places. By this logic, if the pay hike was higher, GDP growth would be even higher. But think of this in terms of money denied for critically-needed infrastructure and social development projects like roads, power plants, schools and hospitals. As if these don’t generate GDP growth The higher salaries mostly benefit those who get them. Period.

This hike will benefit only Central government employees now, but all states and public sector units will soon join the bandwagon (23 million) and the members of industry chambers like CII and Ficci will hear the music louder and dance all the way to the bank.

Top industry and banking analysts have given a big thumbs up to the Union Cabinet’s decision, saying it will “boost consumption in the economy” and lead to higher GDP growth. It’s their fond hope that the pay hike, along with the continued public push for capital expenditure, will steer the economy to higher growth levels of eight per cent and above. “The pay hike of nearly Rs 1 lakh crores for government employees will give a strong boost to the consumer demand and help uplift the growth of the economy,” said A. Didar Singh, Ficci’s secretary-general. Mr Singh has the added benefit of being in the IAS in his earlier avatar and has personally much to cheer about.

But has Mr Singh noticed the IIM Ahmedabad study that says “pay in the government sector is distinctly greater than in the private sector ” Arun Jaitley, therefore, thinks this shouldn’t cause any protests from beneficiaries. The 23.5 per cent average hike in Central employees’ salaries will push up the government’s wage bill, including for arrears, by an estimated Rs 1.14 lakh crores in 2016-17.

It’s not just industry and trade lobbies that say this, even Mr Jaitley and CPI(M) leaders like Nilotpal Basu are saying the same thing. This is when 648 million Indians live below the UN Development Programme-stipulated poverty line. The question we all must ask is: growth at whose cost Mr Jaitley crowing about it is akin to the head of a family who prefers to spend more on smoking and drinking by cutting down on milk for growing children.

A sum of Rs 1.84 lakh crores has been provisioned in the current Budget to pay Central employees (about 10.45 per cent of overall expenditure). The estimated wage bill of governments at all tiers is around Rs 10.42 lakh crores (about 10 per cent of the estimated 2013-14 GDP of about Rs 120 lakh crores).

The three levels of government together employ about 185 lakh people. The Union government employs 34 lakhs, all state governments together employ another 72.18 lakhs, the quasi-government agencies account for a further Rs 58.14 lakhs, and at local government level, a tier with the most interface with ordinary citizens, we have only 20.53 lakh employees. In other words, it simply means we have five persons telling us to do this or do that, for every one supposedly serving us. And whom even these one out of six persons are answerable to is still a big question

Do we then have a big government bearing down on us Not really. Consider this: India has 1,622.8 government employees for every 100,000 citizens. In stark contrast, the United States has 7,681. The Central government, with 3.1 million employees, thus has 257 serving every 100,000 population, against the US federal government’s 840. Now look at the next tier at the state level. Bihar has just 457.60 per 100,000, Madhya Pradesh 826.47, Uttar Pradesh has 801.67, Orissa 1,191.97 and Chhattisgarh 1,174.62. This is not to suggest there is a causal link between poverty and low levels of public servants: Gujarat has just 826.47 per 100,000 and Punjab 1,263.34. The troubled states, or really speaking, troublesome states, fare far better on this count. Mizoram has 3,950.27 public servants per 100,000 population, Nagaland has 3,920.62 and J&K 3,585.96. Barring Sikkim, which has 6,394.89 public servants per 100,000 population, no state comes close to international levels. Very clearly, for the most part, India’s relatively backward states have low numbers of public servants. This means staff is not available to provide education, health and social services needed to address poverty. It would seem that instead of getting more and better government employees, we are getting a more expensive government.

We are now riding the tiger of a high-wage enclave of government employees, who also drive consumption and thus GDP growth. It may now be difficult to get off this tiger. It’s clearly much too big to be tamed. But can we make it work a bit better for the country How about increasing government revenues The National Institute of Financial Management, a finance ministry think tank, estimates that the “black economy” is now equal to 75 per cent of GDP. That means Rs 150-200 lakh crores due as taxes go uncollected. I haven’t seen the government targeting higher tax collection in specific terms. It’s high time we did so.

The writer, a policy analyst studying economic and security issues, held senior positions in government and industry. He also specialises in the Chinese economy.