Wednesday, 29 June 2016

Current Affairs

The 7th Pay Commission

The TV and newspapers are full of reports and articles on the 7th Central Pay Commission recommendations that have been just accepted by the Government. The main points that stand out are (1) the minimum salary would be Rs. 32000 per month and the maximum  Rs. 2,50,000 per month and (2) that this would result in a pay-out by Government towards the revised salary and pensions to the tune of over Rs. 100,000 crores in a full year.
Starting with the 5th Pay Commission in 1996 that had a pay-out of about Rs. 35,000 crores in a full year, to the 6th Pay Commission that resulted in additional liabilities to Government of about Rs. 60,000 crs. in a year, we now have the 7th Pay Commission with its liability of about Rs. 100, 000 crores. The Hon'ble Finance Minister has been candid that this would impact the fiscal deficit position besides possibly adding to the current inflation rate.
Economic theory teaches that prices of any good or service are basically determined by supply and demand. This applies - with some "ifs" and "buts" - to price of labour, land or capital. In the non-government sector salaries and wages are usually determined by bilateral or trilateral negotiations on two major considerations: the demands by the labour and the "paying capacity" of the industry or service organisation. Government obviously is not bound over by any "paying capacity", because it can always raise taxes to pay this liability; or borrow or just print notes.
Straight-forward wage-fixation is supplemented by issues of allowances and perquisites (that is, non-monetary benefits, e.g. casual leave. special leave, leave without pay)  and by the work environment, job satisfaction and all that. Besides, there is also the element of "Minimum Assured Career Progression" that Pay Commission have recommended, which is really unknown in the non-government sector. And at the end of it all, comes the "deliverables" or the "output". In the case of products, this is simple enough; but for services, especially for public or government services, this is certainly difficult to define or quantify.
Any responsible government has also to factor in how this relates to the rest of the country, to the average Per Capita Income, to the Median Income, and so on in the rest of the economy, and to the output, the level of services, pattern of savings (including diversion of savings into real estate or gold), pattern of consumption at different income levels, and all that.
It is only then that major distortions in the economy may be avoided.

The 7th Central Pay Commission - "come-backs"
I have had some "come-backs" over e-mail that the original objectives that central pay commissions set out with - to bring about a degree of "parity" between government salaries and  private sector emoluments - has by now been turned on its head. Apparently there is greater resort than before in government in India - perhaps even more in state governments - to "out-sourcing" of services, be it through re-appointment on a contractual basis of a recently-retired employee or an outside "consultant" or a plain service agency, be it for car hire or for security or office maintenance.
Economics, it appears, has a habit of clawing its way back  unexpectedly.

A recent bank scam
A recent press has it that the Directorate of Revenue Intelligence in the Government of India has unearthed a Rs. 2240 crores scam under which certain subsidies were given to some exporters for non-existent exports, with the connivance of some bank officials. The question that immediately asks itself is that why the DRI had to find out about this wrong-doing. Is it that the rules and procedures in the banks are not good enough to track down such malfeasance? As some one pertinently put it, "Rules are made for gentlemen. They are meant to be broken by thieves". That brings to the fore some management issues: from which level in the banking system should accountability and vigilance start? Should it be at the level of the branch manager,  or the zonal manager, or where? Banks also have audit departments to do rigorous cross-checks. How do such misdealings escape their attention? It should be clear that someone somewhere is not doing his or her job.

The 7th Central Pay Commission -  A second view-point
Recent discussions with some retired central government officers reveal that they had started their career in a technical wing of government at a starting salary of Rs. 400 per month in 1958 and, with deductions for housing, provident fund, etc., their take-home pay was Rs. 340 per month. When they retired in 1994 at the level of a general manager with overall charge of about 4000 employees their gross salary was Rs. 6800 per month, with a pension of Rs.3400 p.m.
Seen in the perspective of salaries in the private sector in 1994, Rs. 6800 p.m. for a general manager in a government plant may be said to have been lower by at least 30 to 40%, or even more. Yes, they did enjoy some facilities such as subsidised housing, free car, subsidised medical assistance, but adding  these back to the salary still keeps it low relative to private sector, where also senior executives were provided free housing, free car, etc; although these were assessed for income tax as per the permissible limits. So, providing a pension of Rs. 50,000 p.m. to a government officer in 2016, when the price levels are at least  300% higher than they were in 1994 should not raise too many eyebrows. It should make one think.

"Jam today"  versus "Jam tomorrow"
This was one of the adages that was drilled into the minds of students of Economics in the 1950s and 1960s.The idea was that using up current income in extravagant consumption is not a good way to plan one's life and, that saving for the future is a good thing. Seldom did the factor of price inflation enter this discussion.How would Rs. 500 saved each month (that would be a big thing in the 1960s and 70s) at 10% annual interest end up after 10 years, given a 10% annual rate of inflation? Moreover, the inflation was at a Compounded Annual Rate without any remission. If one has it that death and taxes are the only certainties of life, one can safely add inflation as well.
Savings, in the physical sense of setting aside from current income and consumption, was considered to be only way of accruing capital and, with capital, one could obtain assets, be it a house, or a car, or a Frigidaire, or shares and bonds or gold. But most assets, whether a house or a car, depreciate over time and increasingly more has to be paid out for their maintenance.  Thus when bank savings are eroded by inflation, and most types of physical assets have a heavy maintenance cost, it makes eminent sense to transform the savings into land, shares and in gold, because it seems that over a long period, say, 25 to 30 years, they can help to beat the inflation.
Going beyond the level of the individual to the national plane, where investment in shares or gold are not practical solutions - though they have been tried out - investment in infrastructure (i.e. roads, railways, ports, power, tele-communications, etc.) that yield a stream of output over many years and thus generate additional income and employment would be a good thing. . Thus "jam tomorrow" seems more sensible at the national plane, but at the individual level seems to be hedged with many "ifs" and "buts".

The Integrated Goods and Services Tax
Politics and law-making is a funny thing: sometimes it is content just to make incremental changes, sometimes, possibly with a huge load of "incrementals", it attempts a paradigm shift. The Integrated Goods and Service Tax is something like the latter. For more than sixty years India lived with the Excise Duty on manufactured goods with its specific rates (to begin with) and moving on to ad valorem rates.Then came the MODVAT and VAT (with its set-off and set-on features) followed by Service Tax in 1994  as part of the "reforms" process, and now there is the Integrated Goods and Services Tax, which has yet to complete the legislative process.
Leaving aside the grumblings about what should be the basic rate of this tax - at 15% or 18% or 22% or whatever - it has the unique quality of attempting to create an Indian Common Market of 1.22 billion people with rising incomes and matching aspirations. It should surely energise the respective state governments to do their best to build on their "comparative advantages" in terms land, water, minerals, industry, agriculture,  manpower, skills, and so on. With 90% of the revenues of the Tax going to the states, they have to husband and utilise these resources in the best possible manner to grow, and create the base for further sustainable growth. That means a lot of hard work is left yet to be done.


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