GDP Growth by Higher Government Salaries?

NEW DELHI: There has been a spate of commentaries about how beneficial the 7th Pay Commission mandated pay hikes, and now approved by the Union Government with retrospective effect will benefit the economy. Others have cheered this with comments like “you pay peanuts you get monkeys!” The metaphor is unfortunate, but illogical as the “monkeys” are already in place, only now the diet has become much more richer.

The high cost of wages has also slowed down intake into government and most departments are hugely understaffed. For instance the Revenue collecting departments are under strength by as much as 45.45%, Health by 27.59%, Railways by 15.15% and that the MHA is under strength by only 7.2% speaks volumes about how much has gone wrong in our system. We have a saying that the main business of government is to collect taxes so that they may be spent for the benefit of all the people. Thus we see the main business of government is now its least concern.

The sheer absurdity of the logic that higher government salaries are beneficial to the economy speaks volumes of the kind of stupidity that permeates our policy thinking at high places. By this logic if the pay hike was higher GDP growth would be even higher. But think of this in terms of money denied for critically needed infrastructure and social development such as rods, power plants, schools and hospitals. As if these don’t generate GDP growth? Higher salaries mostly benefit those who get them. Period.

This hike will benefit only Central government employees for now, but all states and PSU's will join the bandwagon soon (total 23 million) and the CII and FICCI members will hear the music louder and dance all the way to the bank.

Top industry and banking analysts have given a big thumbs up to the Union Cabinet decision stating the move will “boost consumption in the economy” and lead to higher GDP growth. Its their fond hope that the pay hike combined with continued public push to the capital expenditure will help steer the economy to higher growth levels of 8% and above. . “The pay hike of nearly Rs. 1 lakh crores for government employees will give a strong boost to the consumer demand and help uplift the growth of the economy,” said A Didar Singh, secretary general, FICCI. Singh has the added benefit of being in the IAS in his previous avatar and has personally too much to cheer about.

But has Didar Singh noticed the IIM, Ahmedabad study that has found the “pay in the government sector is distinctly greater than that in the private sector?” Arun Jaitely therefore thinks that this shouldn’t cause any protests from the beneficiaries. The 23.5% average hike in central government employees’ salaries will push up the government’s wage bill, including arrears, by an estimated R. 1.14 lakh crores in 2016-17.

It’s not just the industry and trade lobbies that are saying this, even Arun Jaitely and CPM leaders like Nilotpal Basu are saying the same thing. This when 648 million Indians are living below the UNDP stipulated poverty line. The question we all must ask is growth at whose cost? Arun Jaitely crowing about it is akin to the head of a family who prefers to increase his spending on smoking and drinking by cutting down on the milk for the growing children.

A sum of Rs.1.84 lakh crores has been provisioned in the current budget to pay central government employees - about 10.45 per cent of its overall expenditure. The estimated wage bill of government at all tiers is around Rs.10.42 lakh crores or about 10% of the 2013-14 GDP of about Rs.120.00 lakh crores. The three levels of government together employ about 185 lakh persons. The central government employs 34 lakhs, all the state governments together employ another 72.18 lakhs, quasi-government agencies account for a further 58.14 lakhs, and at the local government level, a tier with the most interface with the common citizens, we have only 20.53 lakhs employees. In other words it simply means we have five persons telling us to do this or do that, for every one supposedly serving us. And whom even these one out of six persons are answerable to is still a big question?

Do we then have a big government bearing down on us? Not really. Consider this: India has 1,622.8 government servants for every 100,000 citizens. In stark contrast, the U.S. has 7,681. The central government, with 3.1 million employees, thus has 257 serving every 100,000 population, against the U.S. federal government's 840.

Now look at the next tier at the state level. Bihar has just 457.60 per 100,000, Madhya Pradesh 826.47, Uttar Pradesh has 801.67, Orissa 1,191.97 and Chhattisgarh 1,174.62. This is not to suggest there is a causal link between poverty and low levels of public servants: Gujarat has just 826.47 per 100,000 and Punjab 1,263.34The troubled states or really speaking the troublesome states actually fare far better on this score. Thus, Mizoram has 3,950.27 public servants per the 100,000 population, Nagaland 3,920.62 and Jammu and Kashmir 3,585.96. Bar Sikkim, with 6,394.89 public servants per 100,000, no state comes close to international levels.

Very clearly for the most part, India's relatively backward states have low numbers of public servants. This means staff is not available for the provision of education, health and social services needed to address poverty. It would seem that instead of getting better government and more public servants, we are getting more expensive government.

We are now riding the tiger of a high wage enclave of government employees, who also drive consumption and hence GDP growth. It may now be difficult to get off this tiger. Its now clearly much too big to be tamed. But can we make it work a bit more for the country? How about increasing government revenues? The NIFM, a think-tank within the Finance Ministry estimates the “black economy” now to be equal to 75% of GDP. That means that Rs. 150-200 lakh crores due as taxes go uncollected. I have not seen the government targeting higher tax collection in specific terms. It’s high time we did so.