governance, political economy, institutional development and economic regulation

Posts tagged ‘Ministry of Finance’

Sarkari pay: Too much love

A picture is worth a thousand words. Even the Oxford dictionary has conceded as much by admitting the emoji “tears of joy” as the first ever “pic-ord” which sums up the prevailing worldwide emotion of relief at even small mercies.

emoji-tears_3502911b

This emoji must have resonated with the 10 million employees and pensioners of the Union government as they read the generally beneficent recommendations of the Seventh Pay Commission presented to Union finance minister Arun Jaitley this week.

 

Coming as it does against the disturbing backdrop of faujis (Army veterans) having to resort to public agitations to get their due, the commission’s key objective seems to have been to soothe jangled sarkari nerves by adopting equity as the leitmotif of its recommendations.

 

Even recommending erosion of the pay “edge” enjoyed by the Indian Administrative Service (IAS) by making it available to all other Group A services, fits in well with this axiom. It mollifies the other cadres whilst giving ample opportunity to the IAS to retain its predominance by other means. After all they are the ones who write the rules today.

 Equity – yes! but for whom?

But equity is an expansive concept spanning generations. How equitable, for example, are the recommendations versus citizens? Citizens have never been considered “stakeholders” by any of the commissions till now.

 

Prime Minister Narendra Modi, however, has different ideas. He wants IAS officers to go beyond the files and the political intermediaries who crowd around key government employees and to consult directly with people to know the truth. Incidentally, this was why district collectors in earlier times went on extensive tours and camped in villages. One wishes that the Commission had also followed this practice of consulting the intended beneficiaries of public services, instead of limiting consultations to only government employees.

Fiscal impact to crowd out public investment, as usual 

The Commission assesses the direct fiscal impact of its recommendations at `1 lakh crore ($15.5 billion) per year on pay, allowances and pension for 10 million employees and pensioners. The unassessed indirect impact will be at least thrice this amount, since the ripple effect raises all public sector employees’ wages in state and local governments and those in the state-owned enterprises who number 12 million, excluding pensioners.

 

The question that 220 million households — comprising the rest of India who do not partake of this public bounty — are likely to ask is why should each of them pay an additional `4,500 every year to finance this splurge?

Income Tax

Government pay is already indexed 100 per cent to inflation and pension is similarly indexed substantially. Any increase in the “real” pay — after accounting for inflation — needs to be justified against additional or better work performed. There is no evidence of any such link compelling the proposed enhancements.

 

Most importantly, the additional burden is ill-timed. It is mere statistical jugglery to justify the fiscal burden (0.65 per cent of GDP) by pleading that it is less than the burden (0.77 per cent of GDP) imposed by the preceding Sixth Pay Commission a decade ago. Another argument is that the prospects for economic growth are bright, making the additional burden manageable. This is iffy reasoning.

 

The fiscal challenges faced by the government today are far more daunting than in 2009, when there were expectations of a quick rebound in world economic growth. Consider that the aggregate, cumulative loss of state electricity boards alone is around `3 lakh crores ($45.5 billion) which needs to be dealt with to improve electricity supply. Union minister of state for power, coal, new and renewable energy Piyush Goyal has taken a hard stand against the Union government bearing the burden without basic reform within these entities. This is the right way to go. If subsidies for the poor need to be narrowly targeted, so must “real” public sector salary enhancements, and that too only to reward the few performers in the vast government machinery and not spread equitably like largesse to all.

Link public pay enhancement to higher than targeted GDP growth 

Given this background prudence dictates that even if the recommendations are accepted in-principle, actual accrual and pay out of these amounts should be graduated. An option to link pay enhancements with performance is to link their payout to GDP growth which is a specific, measurable, assignable, realistic, time-related specific, measurable, assignable, realistic, time-related (SMART) metric for aggregate government performance.

 

One obvious option is to use the existing proportion of emoluments to GDP of 2.77 per cent. This can be thought of as the “share” of Union government employees in GDP. A similar share can be justified for distribution of the recommended pay enhancements out of the actual additional value created above the GDP growth target.

 

Using this principle, for every 0.5 per cent of growth above the target (say 7.5 per cent instead of 7 per cent), the amount available in that year would be around `30,000 crore. This is less than one third of the assessed fiscal impact of the Commission’s recommendations. Once sufficient “additional” growth has been achieved — say over the next three years — the recommendations can kick in. Alternatively the implementation can be staggered annually. This forces government to perform before increasing the “real” pay of its employees. From the citizens’ point of view this is akin to hiring an auto rickshaw. You only pay after the driver has brought you to your destination — not in advance.

ice cream

No ice cream without results

There is more evidence of excessive generosity. An assured annual increment of 3 per cent seems too generous for an inflation-indexed salary even though it is calculated only on the basic pay. Unearned annual increments should not be more than 1 per cent at best.

Fauji “pension edge” levelled yet again

The concern with equity has driven the commission to extend the principle of One Rank One Pension — granted by the government to the armed forces just prior to the submission of the Commission’s report — to civilians also. This is akin to compounding an earlier mistake. Levelling the armed forces’ and civilian pensions means taking away the “pension edge” which was so tenaciously fought for and won by the armed forces. The downside is that it may spark off a second round of fauji gussa (anger).

veterans

The Commission has done stellar work in sharing employee demographics for the first time. It has also laboriously listed an incredible 196 different allowances and worked meticulously to simplify and rationalise them by recommending termination of 52 and clubbing 36 others into other allowances. That still leaves 108 allowances to be dealt with later. The government would do well to heed the advice that fuller and more transparent budgeting of allowances is necessary.

 

But pay commissions, despite their expansive mandates, are not really expected to create a new architecture for public service. Their job is to shut the maximum number of mouths with the least amount of cash. The Justice Mathur Commission could have done worse. Thank God for small mercies!

7th PC

Adapted from the authors article in the Asian Age November 22, 2015  http://www.asianage.com/columnists/it-s-rip-127

 

The MO-XI connect: going beyond the rice bowl.

sabarmati

(photo credit: narendramodi.in)

Later today when the Chinese supremo savours Khakra (a snack) and toasts PM Modi over a glass of aam-ras (the juice of raw mangoes), on the carefully grassed banks of the Sabarmati river, the symbolism of the location will not be lost on him.

What was till recently a sludge filled, trickle, has been transformed into a full water body. What was only a repository of nostalgia is now a kingdom of dreams and hope illustrating that India has shaken-off its somnolence of the past decade and is ready to Samba. The Sabarmati saga shows that we too can execute Chinese style development- large dams like-Narmada, regulating the water supply; city development projects, like the Sabarmati redevelopment scheme and more recently the ambitious Ganga re-development project. All this, in the face of stiff opposition from the usual bug-bears of large development: environmental fundamentalists who, rather academically, advocate strongly against channeling a river, or indeed doing anything which changes its natural flow.

As the bonhomie gets lubricated by Chaas (buttermilk) PM Modi must drive home the point that India has arrived, by politely refusing the expected Chinese offer of US$ 100 billion in financial support (to trump the Japanese offer of US$ 35 billion) for sundry projects. India is not up for sale to the highest bidder. Such bilateral support comes tied with numerous strings including the compulsory use of Chinese contractors. Japanese credit is the same. Whilst the terms of credit are deceptively attractive, there is no open international competition in the award of contracts. This loads the cost of the contract in present value terms far more than the discount on the interest rate offered.

The losers are usually the tax payers of the country providing the credit and the citizens of the country receiving the credit. The first because such “cheap” credit is funded out of the government budget of the donor country. The second because it is the citizens of the recipient country and users of such projects, who will bear the higher lifecycle cost of “gold plated” projects or the supply of low quality and shoddy goods. The winners are industry and business on both sides of the border, who gain by executing such projects. So expect to see an unholy alliance of Chinese and Indian business, loudly applauding the availability of such bilateral credit.

It doesn’t end there. Babus on both sides of the border will also raise a rousing cheer. The sole job and raison d’etre of our Department of Economic Affairs, within the Ministry of Finance, is to “negotiate” such bilateral credit lines. The Chinese (and the Japanese) have counterpart departments negotiating the supply of such credit. So that is another unholy alliance which undermines the financial autonomy of the country.

For many years, our babus have been used to touring the World Capitals with a begging bowl. None of them ever consider how incongruous it looks to assert our rightful place in the UN Security Council on the one hand, whilst simultaneously looking for some “rice” to fill the bowl.

It is time we changed that. The sustainable budget deficit of the Union Government is around US$ 400 billion. A lot of the existing debt is long term and the fiscal space available for new borrowings is limited. We should not fill the narrow window currently available with “nominally cheap but actually expensive” bilateral credit sources. It is just not worth the erosion of our international perception as a resilient stand-alone economy which seeks and gets credit on commercial terms. The key to financial strength is to spend only on projects which have high rates of economic and social returns and to avoid cost overruns. Money well spent is always rewarded by the financial markets through cheaper costs of borrowing.

Getting money cheap and then wasting 25% of it, which is the standard economic loss of non-competitive bids, does not impress financial markets as a viable strategy because it does not enhance our ability to service the credit.

If we need a bullet train or a super highway or high speed tracks linking our Five Big Metros then let us fund them through a mix of foreign commercial credit and foreign direct investment. That is the cheapest finance available today. Both sources also come with strict oversight on expenses and project management.

As the two supremos dip Bhakri (wheat flat bread) into the Kadhi (tangy sauce) Modi should move to the second agenda item and probe the extent to which the Chinese want to collaborate with India in international commercial ventures, in third countries between their companies and our own Navratnas (premier Indian State Owned Enterprises) and Indian private entrepreneurs. Both sides could learn from such collaboration.

Indian business communities in Africa and East Asia are hamstring by the crushing impact of Chinese competition. If collaboration can replace competition, both China and India benefit. After all, the best business venture is a monopoly, like a single toll bridge across a river. We should emulate the developed world, which advocates competition in overseas markets for their goods and services but hang on to quasi monopolies in their own domestic market.

More creatively, can we form an Indo-Chinese multi-national to promote renewable energy internationally? As a tangible target, what about announcing that by 2019, (1) both supremos would switch from the cars they drive in today, to electric cars and (2) their respective official homes and offices in New Delhi and in Beijing would be powered solely by Renewable Energy solutions manufactured through Indo-China cooperation.

As they scoop up the Kansar (a dessert) PM Modi should broach the third pillar of India-China partnership; a gas pipe line running from Turkmenistan/Iran through Pakistan to India and onto Southern China. Gas is critical to India’s energy plans. It is key to improve air quality in urban areas; provide a clean cooking fuel; power our city generators and reduce the incentive to use fire-wood as a fuel in our villages. Of all the commercial fuels, gas and hydro based energy have the most characteristics of a public good. Both generate the least negative externalities in energy supply. On the supply side, Iran is a traditional friend of both India and China. China has an increasingly dominant position in Pakistan which can facilitate safe passage for the pipeline. Their traditional policy of setting up Pakistan as a counter to India is now questionable in the face of Islamic terror and China’s own problems with Islamic communities in their North West. There is a commonality of interest in accessing gas from Iran. It should be pursued boldly using the plurilateral (Iran-Pakistan-India-Bangladesh-China) approach.

Great leaders are those who go beyond the narrow limits drawn by their babuish advisors. PM Modi and President Xi both have the mandate and the time to establish their credentials. They should start by making this point in Delhi.

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