Growth in GDP by increasing cost of govt!

The truth is now staring us in the face. The latest breakdown of the sectoral contribution to growth is out. Get ready for this. Public administration, which somewhat perversely is classified as a part of services, has now grown by seven per cent over the previous quarter, making it the biggest driver of growth in India. Very simply, this means that as you keep paying government employees more, GDP will keep growing ever faster till one day you run out of breath and cash. In Q3 of 2018, public administration had contributed 17.3 per cent towards growth. In Q4 of 2018, it has grown to 22.4 per cent, making is a fraction smaller than the contribution of manufacturing, at 22.7 per cent.

But hold your breath. Not satisfied with the Seventh Pay Commission’s across-the-board hike of 23 per cent, government employees are hopeful that Prime Minister Narendra Modi will make an announcement on August 15 fulfilling the promise made by the finance minister to give Central employees a pay hike beyond the recommendations of the Pay Commission. They are also hopeful that the retirement age will be raised to 62 years, allowing them to serve this poor and hapless country even longer.

There had been a spate of commentaries about how beneficial the Seventh Pay Commission-mandated pay hikes, now approved by the Union government with retrospective effect, will benefit the economy. Despite this munificence, some government employees have called the 23.5 per cent across-the-board hike peanuts! Others have made comments like “you pay peanuts, you get monkeys” — as if you will now have earnest and honest public servants because the same fellows get more pay? The metaphor is unfortunate as well as illogical, as the “monkeys” are already in place, only now the diet has become much more richer. Fat monkeys are what you will get.

The high cost of wages has also slowed down the intake into the government, and most departments are hugely understaffed. For instance, the revenue collecting departments are under strength by as much as 45.45 per cent, health by 27.59 per cent, and the railways by 15.15 per cent. That the home ministry is under strength by only 7.2 per cent speaks volumes about how much has gone wrong in our system. We have a saying that the main business of government is to collect taxes so that they may be spent for the benefit of all people. Thus we see the main business of government 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 at 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 such as roads, power plants, schools and hospitals. As if these don’t generate GDP growth? Higher salaries mostly benefit those who get them. Period.

The last pay hike benefited 23 million government employees in the Central and state governments and their PSUs. No doubt this will make CII and Ficci members hear the music louder and they will dance all the way to the bank.  No wonder top industry and banking analysts have given a big thumbs up to the Union Cabinet decision, saying the move will “boost consumption in the economy” and lead to higher GDP growth. It is their fond hope that the pay hike, combined with the continued public push to capital expenditure, will help 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 Didar Singh, then secretary-general of Ficci. He will approve, being a former IAS officer who was rehired by the industry trade union. But has Ficci noted the IIM Ahmedabad study that found the “pay in the government sector is distinctly greater than that in the private sector”? The 23.5 per cent average hike in Central government employees’ pay pushed up the government’s wage bill, including arrears, by an estimated Rs 1.14 lakh crores.

While you worry about the high cost of government, I will give you another reason to worry. If you wonder why our public administration is so ineffective, consider this. An analysis by a leading media outfit suggests that roughly 14 per cent of officers get transferred within one year of service and another 54 per cent within 18 months. In other words, 68 per cent, or over two-thirds of India’s top bureaucrats, last on an average less than 18 months at a posting. Only eight per cent of officers analysed had average tenures of more than two years and there are only 14 officers who had managed to complete an average stay of over three years between transfers. So what is the governance that you are getting for all the money that we are spending?

This, when 648 million Indians are living below the UNDP stipulated poverty line. The question that we all must ask is: growth at whose cost? Arun Jaitley crowing about it is like the head of a family who prefers to increase spending on smoking and drinking by cutting down on milk for growing children.

The three levels of government together employ about 185 lakh persons. The Central government employs 34 lakhs, all the state governments together employ another 72.18 lakhs, quasi-government agencies account for a further 58.14 lakhs, and at the 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 that 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 are answerable to remains a big question!

Do we then have a big government bearing down on us? Not really.

Consider this: India has 1,622.8 government servants 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, Odisha 1,191.97 and Chhattisgarh 1,174.62.

This is not to suggest that 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 the troublesome states, actually fare far better on this score. Thus Mizoram has 3,950.27 public servants per 100,000 population, Nagaland 3,920.62 and Jammu and Kashmir 3,585.96. Bar Sikkim, with 6,394.89 public servants per 100,000 citizens, no state comes close to the international levels.

Very clearly, for the most part, India’s relatively backward states have low numbers of public servants.

This means that staff is not available for the provision of education, health and social services needed to address poverty. It would seem that instead of getting better government and more public servants, 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 hence GDP growth. It may be fairly difficult to get off this tiger.