Politics in command

Fiscal prudence has been sacrificed for a populist measure

N Chandra Mohan

Clearly, political rather than economic considerations have dictated the union cabinet’s decision to set up a panel for the Sixth Pay Commission. At a time when the government’s finances are already under severe strain, there was no economic provocation for a move that entails a whopping additional burden of Rs 20,000 crores every year on the exchequer. Revising the wages, retirement benefits of 3.3 million central government employees is, in turn, bound to lead to demands for parity from state government employees, a financial burden which can bankrupt the treasury.

But political logic has trumped economic considerations as the three-member panel has 18 months to deliver its report, a timing which clearly signals the intent of the United Progressive Alliance (UPA) government to revise government employees’ wages before the next general elections in 2008. The compulsion behind such profligacy clearly is electoral gain. As elections draw closer, most governments cannot resist the temptation to loosen the fiscal purse strings to shore up their political fortunes. The fiscal consequences of such measures will obviously have to be borne by the new government at the centre.

What are these consequences? Let us take the Fifth Pay Commission’s experience for a sense of perspective. This was constituted in April 1994 and implemented in 1997 and resulted in the general government’s fiscal deficit, a measure which indicates borrowings, increasing in each of the five years thereafter, hitting a peak of 9.9 per cent of the gross domestic product (GDP) in 2001-02. Considering this experience, none other than the official Economic Survey for 2005-06 issued a warning that “there is need to exercise caution to avoid a repetition of a similar deterioration in the medium term”.

The Fifth Pay Commission award was, in fact, considered the biggest shock to government’s finances during the last decade. The Sixth Pay Commission’s experience is unlikely to be any different. What makes the current prospect appear more daunting is that the government is committed to adhere to the discipline of the Fiscal Responsibility and Budget Management Act, 2004 (FRBM), according to the fiscal deficit must be reduced by 0.3 per cent every year, starting 2004-05. With elections looming on the horizon, sticking to such a timetable is difficult, if not impossible.

On the other hand, there is a cynic’s view that the announcement of the Sixth Pay Commission was precisely intended to ensure that the UPA government meets its FRBM targets. After all, didn’t India’s GDP growth rise in the years following the Fifth Pay Commission? According to national income conventions, the contribution of non-marketed services is estimated according to cost. So giving more wages to babus jacks up the growth rate of public administration and defence and thereby GDP growth. Thus GDP growth, thanks to the Fifth Pay Commission, was higher by 0.5 per cent in 1997-98 and 1998-99 and 0.4 per cent in 1999-2000, according to the economist Shankar Acharya.

The upshot is that while the fiscal deficit, no doubt, will rise due to the Sixth Pay Commission award, so too will GDP growth, an outcome that can reconcile fiscal profligacy with FRBM obligations. But cynicism apart, there isn’t a shred of doubt that this award will certainly strain the already parlous state of the government’s finances and present the next incoming government with empty coffers. At a time when its hands are tied in raising resources through selling the government’s equity in public sector undertakings, there clearly was no economic rationale for this cabinet decision.