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Tuesday, 18 February 2014

Challenges before the Seventh Pay Commission : Central Government Employees

Challenges before the Seventh Pay Commission : Central Government Employees

- by Raj Kumar Ray (Financial Express)

 SUMMARY

Growth has fallen in the last couple of years eroding revenue while inflation remains stubbornly high. The new pay commission will have to factor in both concerns

Why does the government appoint a pay commission every decade?
A pay panel is appointed every decade to review and recommend the pay structure for central government employees taking into account various factors such as cost of living, inflation rate, revenue growth and fiscal deficit of the government, growth in workforce, private sector job scenario and wages, and economic growth. The government has so far appointed six pay commissions. The demand for a permanent pay commission set up through an Act of Parliament has been raised once but it was not accepted by the government.

Earlier this month, Prime Minister Manmohan Singh approved the constitution of the Seventh Pay Commission—to be headed by retired Supreme Court judge Ashok Kumar Mathur—to suggest the extent of hike in salaries of the 7-million-plus central government staff and pensioners with effect from 2016. Petroleum secretary Vivek Rae has been appointed as a full-time member, NIPFP director Rathin Roy will be part-time member and Meena Agarwal will be member-secretary of the new pay panel.

How did the process of pay hikes evolved?

The pay panel recommendations have evolved with time. The first central pay commission (CPC) adopted the concept of “living wage” to determine the pay structure of the government staff. The third CPC adopted the concept of “need-based wage”. The fourth CPC had recommended that the government constitute a permanent machinery to undertake periodical review of pay and allowances of its employees, but this was not accepted by the government. The sixth CPC suggested performance related incentive scheme (PRIS) to replace the ad hoc bonus and productivity-linked bonus schemes. The pay panel also suggested that the running pay band be extended to all grades of officers. Also, the sixth pay panel suggested slashing of the number of grades to 20 and one distinct pay scale for secretaries from the 35 existing earlier.

By how much have the public sector salaries increased every decade following the pay panels’ recommendations?

By and large, the salaries of central government staff have tripled every decade. The sixth CPC suggested 3 times increase in salaries from that of fifth CPC levels—it was 2.6 times for lower grade officials and slightly above 3 for higher grade staff. The increase in salary during fifth CPC was 3-3.5 times the fourth CPC levels.

What has been the fiscal implication of pay hikes?
Government finances have come under strain after implementations of each CPC. After the fourth CPC, the combined fiscal deficit of centre and states rose to 9.5% of GDP in FY87 from 7.7% in FY86. The impact was significantly harsh during the fifth CPC, especially for states—the combined fiscal deficit rose from 6.1% in FY97 to 7% in FY98 and then to 8.7% in FY99 with the aggregate deficit of states surging from 2.6% to over 4%.

In the case of the sixth CPC, the government expenditure increased by about Rs 22,000 crore during 2008-09—Rs 15,700 crore on the general budget and Rs 6,400 crore on the rail budget. The Rs 18,000 crore arrears were distributed in two years—40% in FY09 and 60% in FY10. The fiscal implication of sixth CPC coupled with fiscal stimulus in the form of higher spending and tax cuts after the Lehman crisis, increased Centre’s fiscal deficit to 6% in FY09 and 6.5% in FY10 from less than 3% in FY08.


What are the challenges before seventh CPC?
The new pay panel faces many challenges when it starts the process of reviewing the pay structures of babus. First, the economic growth has slowed sharply in the last 10 years—from over 9% between FY06 and FY08 to 4.5% in FY13. This means slower revenue growth and little room for scaling up expenditure on salaries.

Second, the Fiscal Responsibility and Budget Management (FRBM) target has already been revised more than twice after the Lehman crisis and the new target for lowering the fiscal deficit target to 3% of GDP is FY17. This again binds the government to restrict spending on salaries and wages.

Third and the most important factor, inflation has stayed high in the past few years—the CPI inflation (CPI-Industrial Workers and the new CPI) has averaged over 9% in the past eight years, which means cost of living has gone up significantly and hence necessitates higher compensation for workers. The dearness allowance of government staff has already touched 100%, which along with the rise in other allowances have more than doubled salaries since 2006.

Analysts expect the seventh pay panel to suggest 3-3.5 times hike in salaries across various grades from sixth CPC levels apart from a further rationalisation of government staff. Already, direct or permanent jobs in public sector have been shrinking while engagement of contract labour and outsourcing is on the rise. This trend is likely to continue given the fiscal imperatives of the government.

There is a perception that government salaries should rise faster at the higher grades and slowly at the lower grades to keep pace with private sector. It needs to be seen whether the seventh CPC retains the minimum:maximum ratio at sixth CPC level of 1:12. A hike in the ratio should not impinge the fisc much as the top level officials—joint secretaries and above—comprise less than 5% of the overall public sector workforce. The performance related incentives could also be reviewed to retain talent within the public sector. More than the fiscal implication, what matters is the productivity of the public sector. For instance, sluggish clearances needed for large projects have ruined investment and halved the growth rate in last three years. The silver-lining of the next CPC could be that it may boost the services sector growth and help revive the faltering economy from 2016 as higher salaries boost spending on housing, automobiles and consumer electronics.

Source: Challenges before the Seventh Pay Commission
[http://www.financialexpress.com/news/challenges-before-the-seventh-pay-commission/1226949/0]
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Highlights of Interim Budget 2014-2015

Highlights of Interim Budget 2014-2015

  • ONE RANK ONE PENSION ACCEPTED FOR DEFENCE SERVICES.
  • FISCAL DEFICIT FOR 2013-14 WILL BE 4.6 PERCENT OF GDP. CURRENT ACCOUNT DEFICIT (CAD) WILL BE PEGGED TO$45 BILLION.
  • FOOD INFLATION STILL THE MAIN WORRY. DECLINES SHARPLY FROM 13.6 PERCENT TO 6.2 PERCENT.
  • IN THE CURRENT YEAR, AGRICULTURE GROWTH UP AT 4.6 PERCENT.
  • MERCHANDISE EXPORT  2013-14 $ 326 BILLION, UP BY 6.3 PERCENT.
  • DEFENCE ALLOCATION UP BY 10 PERCENT.
  • GOVERNMENT WILL CONTRIBUTE RS. 1000 CRORE TO NIRBHAYA FUND.
  • BIG EXCISE RELIEF TO AUTOMOBILE AND CAPITAL GOODS INDUSTRY.  ATTEMPTS TO BOOST DOMESTIC PRODUCTION OF MOBILE HANDSETS.
  • 67 CASES OF ILLEGAL OFF-SHORE ACCOUNTS DETECTED. ACTION UNDERWAY TO DETERMINE TAX LIABILITY. PROSECUTIONS FOR WILLFUL TAX EVASION LAUNCHED IN 17 OTHER CASES.
The Union Finance Minister Shri P. Chidambaram today sought to present UPA Government’s ‘unparalleled’ growth record, rejecting the argument of policy paralysis. He also outlined a vision for the future with ten major tasks that must be undertaken by the Government of the day. Keeping the fiscal deficit at 4.1 percent of GDP and acceding to the long-pending demand of one rank one pension among defence personnel were other key highlights of the Interim Budget presented by him.

The Minister enumerated path-breaking decisions taken by the Government in 2013-14. These include decontrol of sugar, gradual correction of diesel prices, rationalization of railway fare, starting the process for issue of new bank licenses and restructuring of DISCOMS.

Asserting that the economy is more stable today than what it was two years ago, the Minister said that the fiscal deficit is declining, the current account deficit has been contained, inflation has moderated, the quarterly growth rate is on the rise, the exchange rate is stable, exports have increased, and hundreds of projects have been unblocked.

The Cabinet Committee on Investment (CCI) and the Project Monitoring Group were setup. Thanks to the swift decisions taken by them, by the end of January, 2014, the way was cleared for completing 296 projects with an estimated project cost of Rs. 660,000 crore.

Shri Chidambaram stated that decline in GDP observed in the first quarter of 2013-14 will be arrested and the growth cycle will turn in the second quarter. He expressed the confidence that growth in Q3 and Q4 of 2013-14 will be at least 5.2 percent.

The Finance Minister stated that the annual GDP growth in the last ten years of UPA Government has been above the growth rate of 6.2 percent for the last 33 years. While it was 8.4 percent during UPA-I, it was 6.6 percent during UPA-II.

The Interim Budget estimates the plan expenditure in 2014-15 at Rs. 555,322 crore, almost the same as in the previous year. The non-plan expenditure has been raised slightly to Rs. 12,07,892 crore. Fiscal deficit for 2013-14 is likely to be contained at 4.6 percent of GDP and for 2014-15 at 4.1 percent.


PERFORMANCE
The Finance Minister Shri Chidambaram gave examples of fast growth in various sectors in the last ten years. India produces 263 million tonnes of foodgrains now as compare to 213 million tonnes ten years ago. Similar fast growths have taken place in coal production, power capacity and rural roads. Central Government’s expenditure on education has risen to Rs. 79,451 crore as compared to Rs. 10,145 crore ten years back. Expenditure on health has risen to Rs. 36,322 crore from Rs. 7,248 crore in a decade, the Minister said.

Agriculture sector has shown ‘stellar performance’ in 2013-14. Foodgrain production is estimated 263 million tonnes. Production of sugarcane, cotton, pulses, oilseeds and quality seeds has reached new records. Agricultural exports are likely to cross $ 45 billion. Agricultural credit is likely to touch 7,35,000 crore, exceeding the target of Rs. 7,00,000 crore. In the current year, agricultural GDP growth is estimated at 4.6 percent.

Merchandise exports rose by 6.3 percent in 2013-14 to $326 billion.
Eight National Investment and Manufacturing Zones (NIMZ) have been announced and another 5 NIMZ approved in-principle.

Infrastructure has grown by valuable addition to national highways, rural roads, railway tracks and port capacity. Besides, 19 oil and gas blocks were given out for exploration in 2013-14 and 7 new airports are under construction.

MAJOR PROPOSALS
The Government has accepted the principle of ‘one rank one pension’ for the defence forces and has allocated Rs. 500 crore for this purpose.

The target of agricultural credit has been raised to Rs. 8,00,000 crore. The effective rate of interest on farm loans, after interest subvention and incentive for prom payment, has been maintained at 4 percent.

Defence allocation has been enhanced by 10 percent to Rs. 2,24,000 crore. A moratorium period for all education loans taken upto 31.3.2009 has been proposed. It will benefit nearly nine lakh students borrowers by way of reduced interest burden.  Rs. 2,600 crore have been allocated for this purpose.

The Government will contribute Rs. 1000 crore to the Nirbhaya Fund on top of Rs. 1000 crore provided earlier.

Rs. 1200 crore Additional Central Assistance is being provided to the North-Eastern States, Himachal Pradesh and Uttarakhand.

A venture capital fund for Scheduled Castes is proposed to be set up with an initial capital of Rs. 200 crore.

The restructured  ICDS, which is being implemented in 400 districts, will be rolled out in the remaining districts.

Rs. 1000 crore is being proposed to the National Skill Development Cooperation in view of its success in providing skills to the youth.

A VISION FOR THE FUTURE
Among the tasks identified for the health of the economy in the years to come, the Minister called for keeping the fiscal deficit at 3 percent of GDP, promoting foreign investment, keeping inflation at a moderate level, and time- bound implementation of financial sector reforms. He also emphasized the need to rebuild infrastructure and promote manufacturing. Keeping subsidies under check, addressing the decay in cities and skill development will need to be given emphasis. States must share costs of flagship programmes so that more resources can be allocated to defence, railways etc.

REVENUE PROPOSALS

To give relief to automobile industry which is registering unprecedented negative growth, it is proposed to reduce the excise duty for the small cars, motor cycles, scooters and commercial vehicles by 4 percent. It will be cut from 12 percent to 8 percent.

The excise duty on SUVs is proposed to be reduced by 6 percent. From 30 percent to 24 percent.

In case of large and mid-segment cars, it is proposed to reduced excise duty by 3 percent i.e. 27/24% to 24/20%. All these reduced rates will be applicable upto June 30, 2014.

To stimulate growth in capital goods and consumer non-durable, it is proposed to reduce the excise duty from 12 to 10 percent on all goods for a period up to June 30, 2014. It is applicable to all goods falling under Chapter 84 and 85 of the Schedule to the Central Excise Act.

To encourage the domestic production of mobile handsets and reduce the dependence on imports, it is proposed to restructure the excise duty for category of mobile handsets. The rates will be 6 percent with CENVAT credit or 1 percent without CENVAT credit.

To boost domestic production of soaps and oleo chemicals, it is proposed to rationalize the customs duty structure on non-edible grade industrial oils and fractions, fatty acids and fatty alcohols at 7.5 percent.

It is proposed to withdraw the exemption from CVD on similar imported machinery to encourage domestic production of the specified road construction machinery.

The Government has succeeded in obtaining information in 67 cases of illegal Off-shore Accounts and action is underway to determine the tax liability as well as impose penalty. Prosecutions for willful tax evasion have been launched in 17 other cases.

Setting-up a Research Funding Organization that will fund research projects selected through a competitive process. Contributions to that organization will be eligible for tax benefit.

The Direct Taxes code (DTC) is ready and it will be placed on the website for a public discussion. The Finance Minister appeals to all political parties to resolve to pass the GST laws and the DTC in 2014-15.

Source: Central Government Employees News
[http://centralgovernmentstaffnews.blogspot.in/2014/02/central-government-employees-challenges.html]
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Cabinet approves release of an additional instalment of DA to Central Government employees and DR to Pensioners, due from 1.1.2019

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