More Pay, Little Work: The 7th Pay Panel Report Is A Disaster; It Must Be Scrapped

by Shanmuganathan Nagasundaram - Jan 21, 2016 05:39 PM +05:30 IST
More Pay, Little Work: The 7th Pay Panel Report Is A Disaster; It Must Be Scrapped

It’s pointless to argue if a 23 percent rise in salaries is too high or too low. What should be debated is why shouldn’t government employees be treated at par with those in the industry. 

A summary reading of the responses by noted economists to the Seventh Pay Commission”s recommendation left me astounded.

Do these economists understand even the basics? Even the few who weren’t optimistic about the report, were so for the wrong reasons. If this is the quality of economic debates that happen in India, it is no wonder that governments get away with asinine and hare-brained proposals such as the MNREGA, running high fiscal deficits since independence and the like. As somebody said, it’s not that these politicians and bureaucrats cannot think – they just confuse feelings for thinking. Assuming these policies are well-intentioned of course. One can have doubts on that front as well.

Arun Jaitley receiving the report of the 7th Pay Commission from Justice AK Mathur.
Arun Jaitley receiving the report of the 7th Pay Commission from Justice AK Mathur.

Before I get into disastrous report, let me point out a very basic flaw in the comments of the above economists. Most envisage a boost to “consumption demand”. This is such a basic while at the same time a terribly flawed concept that I sometimes wonder if a reading of “Economics In One Lesson” by Henry Hazlitt should be made mandatory reading for all policy-making officials as well as economic commentators.

To start with, most confuse “needs” with “demands”. It’s undeniable that the needs of the average Indian citizen are far higher than, say, citizens in an industrialised nation like Germany. But demand is a function of what we produce and not what we need. A farmer’s demand for products and services is a function of his supply of corn or wheat. It’s not dependent on how poor or impoverished he is, but on what his production or supply to the market is. In other words, demand and supply are two sides of the same coin – our demand for goods is a function of our ability to produce.

So with substantially higher pay, will this Pay Commission report not increase the demand from government employees? Yes and No. Again – a very basic flaw that Hazlitt describes as “the seen and the unseen”. While higher pay would indeed increase demand in a certain category of workers, this would simultaneously decrease the demands of another category of the population – the faceless middle-class Indian, by weakening the purchasing power of the currency. In other words, we are merely transferring demand from a deserving set to an undeserving lot. Not only is the economics questionable, but the morality of these proposals is truly horrible.

Doing away with the Pay Commission Report

The current report makes no sense whatsoever to start with. It’s pointless to argue that a 23  percent rise is too high or too low. The entire report is flawed as there is very little connection between the salaries of government employees and their contributions to society. Just take a simple case of teachers’ salaries – a state government teacher’s salary is at least twice, if not substantially higher (maybe even three to four times) than that of an equivalent teacher in a private school. Yet, the productivity and contribution to the cause of education is far higher in a private school as compared to a government school.

It’s not that government employees are lazy or unqualified, but as Bill Gates once put it in the context of time-and-material contracts, “even the mule knows to slow down”. In the way government employment is setup, there’s very little incentive for good behaviour. Worse, there is no  punishment for lethargy.

Unless that is fixed, there is very little point in even debating the pay commission report. If government employees feel that they are underpaid in the interim, they are most welcome to resign and move on. After all, that’s what happens in the labour marketplace and there’s no reason why labour in government has to be treated any differently.

Outsource Most Jobs

It’s my contention that governments the world over have been on a relentless mission creep to the detriment of overall society. The only two functions that a government has to perform are security and settlement of contracts. Every other function, including running schools, building roads, etc., has to be left to the markets. This is not some radical proposition, but one that has always been advocated by the Austrian School of Economics (I will not use the word “free market” economists, as everybody sees himself as one. It is very fashionable for economists to describe themselves as market oriented, while doing the very opposite). This was the underlying philosophy behind the original US constitution.

Now we cannot transform to that society even if we get a John Adams or a Thomas Jefferson as our PM. But in the interim, we can start outsourcing most jobs – as has been done in the case of passport offices. The experience at passport office has become pleasant these days compared to when babus ran the whole system.

I am sure most jobs (perhaps as much as 70-80 percent, if not higher) can be easily outsourced because they need definable skills without much policy-making decisions involved. Provide market related salaries and that’s really the best way of fixing the current system. This will reduce expenses while at the same time deliver superior services to citizens. Till such a system is evolved, it makes sense to keep the Pay Commission report in abeyance.

The question is will Narendra Modi & Co do it? I am very sceptical. Despite professed beliefs in markets and the concept of “minimum government”, not much action has happened on the ground – And this is under extraordinarily favourable conditions of collapsing oil prices. The market honeymoon with Modi might have died, but the oil windfall honeymoon continues. If they cannot fix the system under these conditions, it might be too late a couple of years down the line.

About the Author

Shanmuganathan “Shan” Nagasundaram is the founding director of Benchmark Advisory Services – an economic consulting firm. A subscriber to the principles of Austrian Economics and Libertarianism, he can be contacted at shanmuganathan.sundaram@gmail.com

Shanmuganathan N is the CIO at Plus43 Wealth Advisors. He can be contacted at shan@plus43capital.com.

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