Face to face: Expectations and apprehensions have increased with the announcement of formation of the Eighth Pay Commission.

If you want talent then salary should be of global level.

Author: Nilanjan Ghosh
Every time the recommendations of a new Pay Commission have been implemented, we have seen that it leads to an increase in salaries. It also has a positive effect on purchasing power. Purchasing power means how much people can spend. India’s development process since liberalization till now has been consumption based, not investment based. Consumption driven growth happens naturally in India. But this is different from many other countries, such as China. In China this consumption was encouraged through policies.Treatment Factor: The question is how to increase purchasing power in India? There are two main factors at work here for purchasing power. Consumption here accounts for 55 to 60% of the total GDP. That means more than half. After liberalisation, salaries and purchasing power naturally increased due to market forces. In this process, the government also tried to keep pace with the market through pay commissions. Every pay commission has a ‘treatment factor’ associated with it, which is usually decided based on the level of inflation in the economy. Ideally it should be linked to the Consumer Price Index.

Advantage of commissions: The biggest increase in salaries came from implementing the recommendations of the Sixth Pay Commission. After this, state governments also implemented their pay commissions on similar lines. The Seventh Pay Commission also saw a major pay increase. This directly benefited not only the government employees but also the pensioners who retired from government service. Even today there are many pensioners whose pension is two or three times more than their last salary. They are financially better off than many retired employees in the private sector. The social security and stability that government pensioners enjoy is far greater than that of many retired employees in the private sector.

Consumption boost: An important impact of the Pay Commission has been that it boosted consumption among the youth as well as retired people. It is generally believed that the propensity to spend among the youth is higher than that of the elderly. Propensity to consume i.e. when your income increases by one rupee, how much consumption you increase. Apart from this, the propensity to consume is higher in the low income group and middle income group as compared to the high income group. When the income of the salaried class increases, they spend more.

Impact on private sector: Every pay commission also impacts the salaries of private sector employees. Every pay commission creates pressure for salary increase even in the private sector, which affects the entire economic system. When government wages become competitive with private sector wages, the private sector naturally has to raise its wages to get the best workers. Since the private sector does not offer social security or stability like government jobs, they have to bridge the gap through salary increases.

Competition in the world: It is important to understand that even though our economy is the fifth largest economy in the world, our per capita income is still quite low. The reason for this is our huge population. Despite low per capita income, the propensity to consume in India is high compared to other economies. When the Eighth Pay Commission comes and salaries increase based on inflation, it is expected that government salaries will not only compete with domestic private sector salaries but will also be in line with global salaries.

Consumption and Saving: In today’s globalized world, a large number of Indian youth are going abroad for jobs. Because of this, it becomes necessary that the wages be improved on the basis of Purchasing Power Parity. This will accelerate consumption in India. Over time this will also promote savings. Savings form the basis of pooled investable funds for the economy, which encourage investment for economic growth. Therefore we should look at this entire process from a positive perspective.

Price Challenge: But it also comes with some challenges. One of these is Demand-Pulled Inflation, i.e. pressure on price levels due to consumption. Pooled Investable Funds will increase in the medium term, but if supply side bottlenecks are removed, this inflation can be controlled. This is an aspect which the government will have to consider.

To target: If we want to achieve the goal of a developed India by 2047, we have to ensure that our wages are globally competitive. For global competition, wages should be determined keeping in mind Purchasing Power Parity. This will not only encourage domestic talent but will also provide an opportunity to attract the best talent from other countries.
(The author is director of CNED and ORF Kolkata)

Salaries of government people are already higher

Author: Bharat Jhunjhunwala
According to a study conducted by the World Bank, the salaries of government employees in India are 7 times the income (i.e. per capita GDP) of an ordinary citizen of the country. South Korea comes at number two, where the salary of government employees is 4.5 times. In many other Asian countries like China, Vietnam, Indonesia, Philippines, Singapore, Pakistan and Sri Lanka, the salary of government employees is double or less than the average income of the country. The salaries of government employees in India are currently very high compared to other countries. Apart from this, government officials also earn income from corruption. According to a study conducted by Bibek Debroy, Economic Advisor to the Central Government, the amount of corruption is 1.26% of the country’s GDP (Gross Domestic Product).

Wrong effect: The high salaries of government employees have affected all the systems of the country. The youth have lost interest in studies. They see that a student who was normal in studies got a government job just because he/she had a degree and is getting a high salary today. The intention of the youth of the country is to get a government job by getting a certificate instead of doing productive work after getting education.

Impact on politics: Secondly, income is less in productive work and more in government jobs. That’s why our universities are only giving certificates instead of providing education. The country’s politics has also been affected by this. Every community wants reservation to get its share in higher salaries. Due to this, reservation mentality is being created all-round. Today politics is not being run keeping the progress of the country at the center but is being run according to the electoral importance of different communities.

Income vs Consumption: Third, high salaries of government employees are hampering economic growth. Marginal Propensity to Consume is a concept in economics. This concept tells that if you get an additional income of Rs 100, then how much of it do you use for consumption and how much do you save. If additional income leads to more consumption then demand is created in the market. Suppose a government employee was given an additional salary of Rs 100. My assessment is that he/she will consume around Rs 50 and invest Rs 50 in gold, property or share market etc. In comparison, if the same Rs 100 is given to a rickshaw puller, he/she will consume Rs 95 and save Rs 5.

Demand cycle: Therefore, it is right to say that the increase in the salary of government employees will create a demand of Rs 50 in the market. But we are forgetting that if the same amount had gone into the pocket of the common man, a demand of Rs 95 would have been generated in the market. Understand that if Rs 100 is deducted from the salaries of government employees, the demand will be reduced by Rs 50. If the same Rs 100 is given to the common man, a demand of Rs 95 will be generated. Demand of Rs 45 will be generated in the market without any expenditure. Therefore, it is not right to achieve economic development through salaries of government employees.

Salary cut: In view of similar facts, Martin Feldstein, Chairman of the Council of Economic Advisors of America, once said that when a large number of applicants came for the vacancy of Air Traffic Controller, their salaries should be reduced. We receive 2 lakh applications for the appointment of 70 IAS officers. It is clear from this that we should also cut the salaries of government employees, so that the attractiveness of government jobs reduces and the attractiveness of productive work increases.

Unbalanced Contribution: The opposite argument is that the salaries of government employees are lower than those in the private sector. This is true for higher level employees. But according to the National Statistical Office of the Government of India, the contribution of the government to the country’s income is 20% of the GDP while the share of salaries is 40%, which is unbalanced. In comparison, the private sector generates 36.3% of GDP and provides 35.2% of wages, which is in balance. Therefore, the salary of government employees in the country’s GDP is currently twice that of the private sector.

Private Member: People who do not do government jobs should be appointed in the 8th Pay Commission. When the members of the Pay Commission are government employees themselves, their basic objective is to increase their personal income. Apart from this, three points should be included in the terms of reference given to the Pay Commission. First, income from corruption will also be looked at. Second, the salary of government employees at the global level and the ratio of per capita GDP will be looked at. Third, a cut in the salaries of government employees may also be recommended.
(The author is a senior economist)