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Business Commentary/Dilip Thakore

Supine government, greedy staff

If your entertain any doubt that politicians and bureaucrats hold this nation by the throat, you would do well to study the implication of the sharp hike in the already generous Fifth Pay Commission's award to central government employees.

On September 11, the central government and a Joint Consultative Committee representing lower grade central government employees concluded an agreement which will impose an additional expenditure burden of $ 1.97 billion (over and above the $ 3.11 billion allocated in the Union Budget for this purpose) on the exchequer in the current fiscal year ending March 31, 1998. Thus with the flourish of a pen and an irresponsible handshake, the United Front government's carefully crafted economic programme built around and premise that the center's fiscal deficit would not exceed 4.5 per cent of GDP has been torpedoed.

There is a considerable amount of confusion in the collective public mind about the importance of limiting the government's fiscal deficit to an ideal of three per cent of GDP. The discovery of the importance of the fiscal deficit, that is, the gap between the government's aggregate revenue and total expenditure including borrowings, is a relatively recent phenomenon. Only in the 1980s did IMF and World Bank economists begin identifying fiscal deficits as the prime cause of in inflation and low rates of economic growth in developing nations. Hitherto governments in the LDCs (less developed countries) where central banks are far from autonomous, merrily ran up budgetary deficits and covered them by borrowing heavily from captive financial institutions and the market.

The discovery that such borrowings pre-empt public savings and drive up interest and inflation rates is of relatively recent origin. Moreover the plain truth that governments tend to use public savings much more inefficiently than private sector firms and entrepreneurs is now being accepted by economists of all ideological persuasions. Hence the hue and cry about the Union government's misplaced generosity towards its own employees which has jeopardised the limiting of the fiscal deficit to $181.81 billion equivalent to 4.5 per cent of GDP.

Though the general populace tends to be ignorant of the implications of increases in government spending, much of the anger within the ranks of the intelligentsia and the business literate has been provoked by the supine manner in which the Union government has caved in to the irresponsible demands of its employees.

While recommending a massive increase (aggregating $ 3.1 billion or $ 763 per capita) in the pay packets of central governments employees who are widely perceived as corrupt and inefficient, the Commission had also recommended a 30 per cent reduction (spread over 10 years) of the staff strength of the grossly over-manned central government and productivity bench marking. But the group of ministers negotiating with the employees unions gave them an assurance that there will be no downswing or privatisation while accepting almost all other additional demands including a 40 per cent increase in basic pay with effect from January 1996, assured career progression, increase in casual leave and higher annual bonuses. The consequence: the wage bill of the Union government has shot up from $ 7.63 billion to $ 12.73 billion per annum absorbing 40 per cent of New Delhi's net tax revenue this fiscal year.

Consequently, budgeted outlays for education, health and social services are certain to be pruned. Though the government has tried to recover lost round by clearing (September 16) a resource mobilisation package which imposes additional taxes on imports, cuts down non-plan expenditure by five per cent and steps up divestment of equity in public sector enterprises to raise an estimated $ 1.91 billion, it is highly unlikely that it will realise anywhere near the targeted amount. Besides, cuts in plan expenditure at a time when investment in infrastructure development is top priority and additional customs imposts flying directly in the face of the economic liberalisation programme, are likely to do a great deal of harm to the economy at a time of recession in industry

But in any event the government's surrender to its own unions followed by a panicky resource mobilisation effort is sure to set a bad example. A well-kept secret of the government is that the nation's fiscal deficit is actually way above 4.5 per cent if one adds the deficits of the state governments to that of the Centre, being nearer to 10 per cent. And this real deficit is likely to rise further when the employees of the state governments being to agitate for parity with the pay packages of central government employees.

The bitter truth is that government employees, who it is now commonly accepted hinder economic development rather than facilitate it, have become and unshakable burden on the Indian economy. And unless they are firmly confronted by linking pay with performance, they are likely to torpedo the entire economic liberalisation and deregulation programme which the national is painfully implementing.

EARLIER REPORTS
Chidambaram Alone & Isolated after pay hike
Govt's debt higher than revealed, warns RBI
Govt agrees to pay hike

Dilip Thakore