Submitting the report of the Sixth Pay Commission to Finance Minister P Chidambaram on Monday, Chairman Justice B N Srikrishna called the recommendation for a hike of 40 per cent in salaries of over 4.5 million Central Government employees and doubling of most allowances “something good for the nation”. At the same time, the implementation of a Pay Commission’s recommendations has serious implications on the fiscal health of both the Centre and the states. Many, in fact, have argued against such panels, the first of which was constituted back in 1946. A look at the functioning of pay commissions:•The need for a pay panelThe salaries of some constitutional functionaries, like the President, Chief Justice of India, Supreme Court and high court judges are prescribed in the Constitution. These can be increased only through an amendment or Act of Parliament. But that leaves out lakhs of others employed by the Centre, including secretaries, Armed Forces and police personnel, engineers, scientists, as well as Class IV workers. The decision on their pay revision rests with the Government. It was felt that given the gigantic and sensitive nature of the exercise, pay revisions should not be undertaken by a single ministry or individual. Thus the decision to set up Pay Commissions, which apart from salary review also take into account cadre review, lateral entry, promotion opportunities, retirement benefits and conditions of service.Pay Commissions, in fact, are successors of the Royal Commissions set up during the British Raj. Most countries no longer have such commissions setting pay scales. Instead, they have switched to negotiated pay settlements, which are decentralised to the local level. •The frequency of Pay Commissions The Centre usually sets up one every 10 years, though there is no stipulation regarding any time period for them. The pay panels generally take two years to announce their award. The last pay panel was set up in 1994 under the P V Narasimha Rao Government, while Manmohan Singh was the Finance Minister. Its recommendations came into effect from January 1, 1996. Given this, a Sixth Pay Commission was overdue, and it was set up in July 2006. Justice Srikrishna has directed that the sixth pay panel report should be implemented from January 1, 2006.•The functioning of a pay panelNormally, a retired judge heads the panel, while an economist has to be among its members. Apart from Srikrishna, the Sixth Pay Commission comprises Professor Ravindra Dholakia, J S Mathur and Sushama Nath. The commission reviews the existing pay structure, and invites suggestions from various employees’ associations and trade unions etc, before finalising its recommendations. Associations of IAS officers, revenue services, audit services, railway services, Class IV employees, are among those who submit their memoranda to the panel. Even the defence forces submit their suggestions. The panel also invites associations to make oral presentations. The report is then submitted to the Government. •Criteria for fixing salariesA lot of factors are considered before determining the salaries. While the status of the economy is an important consideration, rate of inflation, growth rate of per capita income and changed living standards are also taken into account. Typically, a Pay Commission first determines the two cardinal points of the salary structure of Central Government employees — the minimum pay of the lowest functionary and the salary of the highest paid secretary to the Government. Once the minimum and maximum is fixed, it becomes easier to deduce other salary brackets. For fixing the minimum level, the panel considers general norms like a minimum food requirement of 2,700 calories per adult, clothing requirement of 72 yards per annum per family etc. Wages paid for comparable work, children’s education, recreation costs and provisions for old age are also considered. •The government responseThe pay panel’s recommendations are not binding on the Government. It can modify the award after taking into account fresh representations. •Financing the pay hikeWhile calling for the pay hike — the Sixth Pay Commission’s recommendations will cost the exchequer Rs 12,561 crore in 2008-2009 — the commission does take into account the Government’s ability to pay. However, the problem arises when states and government-run corporations, under pressure from employees, adopt the Central pay panel award blindly. The problem is especially acute as almost 90 per cent of the revenue of most state governments goes towards paying salaries. The implementation of the Fifth Pay Panel award, for example, created a huge fiscal problem for the states. The National Development Council finally had to step in, and at its behest, the Union Finance Ministry came out with a financial package to bail out the states. In fact, one month ago, RBI cautioned state governments against adopting the Sixth Pay Panel’s recommendations unmindful of their capacity to bear the burden. Unmindful of this, at least Madhya Pradesh has already constituted a Sixth Pay Commission of its own, which is to submit its report by end of the year.While the financial impact of the second pay panel was Rs 39 crore, the third cost the Government Rs 144 crore, the fourth Rs 1,282 crore and the fifth Rs 17,000 crore. After the Fifth Pay Commission recommendations, the Central Government’s wage bill shot up by nearly 99 per cent, and the state governments’ by 74 per cent. Around 13 states did not have money to pay salaries in 2000. In its report, the Sixth Pay Commission hopes that higher tax revenues in the coming years and strong financials will help most of the state governments meet its recommendations. The Finance Ministry has worked out that a 20 per cent increase in salaries of government employees in all 26 states would entail an outgo of Rs 46,100 crore annually. Its assessment is that only three states have provided for it at 20 per cent, six states at 10-15 per cent, while the rest have no money for any increase. That would leave it to the Thirteenth Finance Commission to provide the extra money when it submits its report in two years.•The criticismBusiness bodies like the CII, FICCI and Punjab, Haryana and Delhi Chambers of Commerce and Industry (PHDCCI) have argued that Pay Commission recommendations, when implemented, stifle economic growth. Two years ago, the World Bank held the Fifth Pay Commission as the “single largest adverse shock” to India’s strained public finances. In 2005, a committee set up by the Government and headed by Cabinet Secretary B K Chaturvedi, had also opposed the demand for a Sixth Pay Commission. It said the Centre might not be able to bear the additional burden as the states were just recovering from the impact of the Fifth Pay Commission. The Twelfth Finance Commission had also urged the Government to stop the practice of increasing salaries by appointing panels every 10 years. Economists also point out that the Government just implements the monetary benefits part of a pay panel’s report. Some of the Fifth Pay Commission’s recommendations including slashing the government workforce by 30 per cent, abolishing 3,50,000 vacant posts and reducing the number of pay scales from 51 to 34 were never implemented.
