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Sixth Pay Commission may derail economy

By George Iype
February 09, 2006 15:43 IST
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'The Fifth Pay Commission (set up in 1994) recommendations resulted in a Rs 530 billion payout by the government. The next (sixth) pay commission would effectively wind up Indian sovereignty.'

-- Arun Shourie, former Union minister for divestment, statistics and programme implementation

Cut to the present.

The stock markets are on fire, the economy seems to be chugging along well and global heavyweights bullish on India are pitching tent across the country.

Against this backdrop, trade unions and government employees associations have been asking the government some tough questions: How can central and state government employees' salaries remain stagnant when India is booming? When India Inc is a success story, how can industrial wages in the country remain so low?

In response, Prime Minister Dr Manmohan Singh told a press conference last week: 'The time has now come for a new commission. We are preparing for it.'

Does that mean the government is preparing to shoot itself in the foot or does it mean that government employees will finally get a raise? Read on to find out.

What is a Pay Commission?

It is an administrative system/mechanism that the Government of India set up in 1956 to determine the salaries of government employees.

The First Pay Commission was established in 1956, and since then, every decade has seen the birth of a commission that decides the wages of government employees for a particular time-frame.

For instance, the recommendations of the Fourth Pay Commission covered the period between 1986 and 1996. The Fifth Pay Commission covered the period between 1996 and this year.

Why was there a hue and cry about the Fifth Pay Commission?

Because the implementation of the Commission's recommendations ravaged the finances of the central and state governments.

The central government declared salary and allowances hikes for its approximately 3.3 million employees, and insisted that the state governments too revise the pay of their employees as per the Commission's recommendations.

The result: Before the Fifth Pay Commission recommendations came into effect, the central government's wage bill (including pension dues of Rs 50.94 billion) stood at Rs 218.85 billion in 1996-1997.

It shot up by nearly 99 per cent to Rs 435.68 billion in 1999-2000.

What about the state governments?

Their wage bill went up by 74 per cent to Rs 898.13 billion in 1999 from Rs 515.48 billion in 1997.

At present, almost 90 per cent of a state's revenues goes in paying salaries.

The impact of the Fifth Pay Commission was so brutal that some 13 states did not have money to pay salaries in 2000.

So peeved were some state governments that last year states like West Bengal, Bihar, Orissa, Assam, Manipur, Meghalaya and Mizoram sought a mechanism under which the Centre could not announce a pay revision without consulting the states.

They also sought the Centre's help in offsetting the impact of the Fifth Pay Commission and a national wage policy to replace pay commissions.

So the Fifth Pay Commission just recommended hiking salaries of government employees?

No, and therein lies the problem. The government only implemented the monetary benefits part.

Some of the Fifth Pay Commission's other recommendations included slashing the government workforce by 30 per cent; abolishing 350,000 vacant posts and reducing the number of pay scales from 51 to 34, none of which were implemented.

The Commission also suggested that the grant of salary hikes to employees be linked to issues of downsizing government, efficiency and administrative reforms.

Did the Fifth Pay Commission affect the economic reform process?

The jury is out on that. But two years ago, the World Bank held the Fifth Pay Commission as the 'single largest adverse shock' to India's strained public finances.

The global body said India's civil service was 'not unduly' large, but there was a 'pronounced imbalance' in the skills.

In its review, the Bank added: 'There is a pronounced imbalance in the skills mix since 93 per cent of the civil service comprised class III and class IV employees for both the Centre and various states.'

So, is mulling the Sixth Pay Commission a sudden decision?

For the last two years, Communist leaders and trade unions have been demanding the setting up of such a commission.

Last year, the government set up a committee to study the demand.

The committee, headed by Cabinet Secretary B K Chaturvedi, turned down the request for constituting the Sixth Pay Commission. The committee said the Centre might not be able to bear the additional burden and the states were just recovering from the impact of the Fifth Pay Commission, whose recommendations were implemented in 1997.

The Twelfth Finance Commission also urged the government to stop the practice of increasing salaries by appointing pay commissions every 10 years.

So why the sudden turnaround?

This is what Prime Minister Manmohan Singh had to say: 'We have decided this. The last pay commission was set up in 1994. The time has now come for a new commission. We are preparing for it.'

Congress sources say the rising political pressure from the Communists -- key partners in the United Progressive Alliance coalition -- has prompted Prime Minister Singh to announce the new pay commission.

What about the drain on government finances?

New Delhi now argues the Sixth Pay Commission will not adversely affect the states as they are sitting on cash surpluses close to Rs 400 billion.

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