Saturday, September 20, 2008

World Business

Quick Take
Will the new pay panel recommendations create problems for the exchequer?

22 Aug 2008

We asked... Sivasubramanian K.N., senior portfolio manager, Franklin Templeton; Indranil Pan, chief economist, Kotak Mahindra Bank; Mohan Guruswamy, economist, Center for Policy Alternatives; Jayanta Sinha, MD, Courage Capital Mana-gement; Apporva Varma, corporate advisor, CEEZAY Trade Mart; Rajeev Karwal, founder director, Milagrow; V. Ramachandran, director (sales and marketing), LG India; Amit Azad, director, Azad Financial Services; Rajeev Sinha, president, TKFI; N. Vasu-devan, president, Trade Union Coordination Committee; Mukund Thatte, consultant plastic and hand surgeon, Bombay Hospital

Sivasubramanian K.N.
“Fiscal deficit will widen and interest rates could be pressured as the Centre may garner resources.”

Sivasubramanian K.N., senior portfolio manager, Franklin Templeton

Amit Azad
“As long as there is accountability, parity between public and private sector salaries is positive. ”

Amit Azad, director, Azad ” Financial Services

Indranil Pan
“The hike will increase fiscal deficits by 0.3 per cent. Tax collections should prevent borrowing.”

Indranil Pan, chief economist, Kotak Mahindra Bank

YES BECAUSE: Government salaries already form 6 per cent of India’s GDP, and will rise further. The additional cost for Uttar Pradesh alone will be Rs 5,178 crore a year. The total increase for all states, the central government, the military, etc. could be nearly Rs 17,798 crore. This will certainly widen India’s fiscal deficit, which is already burdened with high oil subsidies and the Rs 71,600-crore farm loan waiver. Interest rates could face further pressure as the government looks to scrape together enough resources for the payout. Another area that could be hit is expenses on national infrastructure such as roads or ports, power grids. Currently, capital expense-to-revenue expense ratio is roughly 12 per cent of the budget. Now, this ratio will drop even further.

NO BECAUSE: The pay commission structure should be seen holistically rather than just as a cost. Government employees do with salaries far below those in the private sector. In some cases, private-sector counterparts of top bureaucrats draw salaries up to 10 times higher. These inequalities make it difficult to retain good talent. While some officials certainly are corrupt and inefficient, this can only be considered legitimate if their grouses of being poorly paid and working in dismal conditions are removed. Low pay is the final straw that pushes bureaucrats towards corruption. The additional income for government employees will lead to higher consumer spends. In the long run, this will raise domestic demand, pumping money back into a weakened economy.

The additional strain comes at a time when payments towards farm loan waivers, fertiliser subsidies and revenue losses from inflation-fighting measures — a total of about Rs 70,000 crore — also strain the exchequer. On top of this, the burden of the oil and fertiliser bonds could create some destabilising pressures on bond yields. The pay commission award of Rs 15,700 crore in this fiscal year will increase the fiscal deficit by another 0.3 per cent, but robust tax collections should prevent additional borrowings. Furthermore, a possible increase in bureaucratic efficiency could reduce the government’s operating expenses. It’s all about timing. Civil servants need to be paid better. The question is, how much can their salaries be increased when public spend is already very high?

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