“We recommend the
linking of pay with productivity, with a simultaneous focus on technology,
skill and incentives. We recommend that Pay Commissions be designated as ‘Pay
and Productivity Commissions’, with a clear mandate to recommend measures to
improve ‘productivity of an employee’, in conjunction with pay revisions.We
urge that, in future, additional remuneration be linked to increase in
productivity.” – 14th Finance Commission
14th Finance
Commission’s recommendations related to Pay Commission, Salary, Pension:- Recommendations
x. We reiterate the
views of the FC-XI for a consultative mechanism between the Union and States,
through a forum such as the Inter-State Council, to evolve a national policy
for salaries and emoluments. (para 17.28)
xi. We recommend the linking of pay with productivity, with a simultaneous
focus on technology, skill and incentives. We recommend that Pay Commissions be
designated as ‘Pay and Productivity Commissions’, with a clear mandate to
recommend measures to improve ‘productivity of an employee’, in conjunction
with pay revisions.We urge that, in future, additional remuneration be linked
to increase in productivity. (para 17.29)
xii. We urge States
which have not adopted the New Pension Scheme so far to immediately consider doing
so for their new recruits in order to reduce their future burden. (para 17.30)
Recommendations –
Public Expenditure Management
118. We reiterate the
views of the FC-XI for a consultative mechanism between the Union and States,
through a forum such as the Inter-State Council, to evolve a national policy
for salaries and emoluments.
119. We recommend the
linking of pay with productivity, with a simultaneous focus on technology,
skill and incentives. We recommend that Pay Commissions be designated as ‘Pay and
Productivity Commissions’, with a clear mandate to recommend measures to
improve ‘productivity of an employee’, in conjunction with pay revisions. We
urge that, in future, additional remuneration be linked to increase in
productivity. (para 17.29)
120. We urge States
which have not adopted the New Pension Scheme so far to immediately consider
doing so for their new recruits in order to reduce their future burden. (para
17.30)
14th Finance
Commission’s detail report related to Pay Commission, Salary, Pension:- Fiscal
Deficit
3.4 The fiscal deficit
of the Union Government relative to GDP declined steadily from 6.1 per cent in
2001-02 to 4.5 per cent in 2003-04. The FRBM Act mandated reducing the fiscal
deficit to 3 per cent by 2008-09. The Union Government achieved this target in
2007-08, with the fiscal deficit declining to 2.5 per cent of GDP. However, in
2008-09 the Union Government undertook several fiscal expansionary measures
such as revision of pay scales based on the recommendations of the Sixth Pay
Commission, waiver of farm loans and the expansion of the Mahatma Gandhi
National Rural Employment Guarantee Act (MGNREGA) to all districts from the 200
districts it was originally slated to cover. In addition, oil prices escalated
sharply, leading to a rise in subsidy. As a consequence of all this as well as
the global crisis, the fiscal deficit of Union Government increased to 6 per
cent in 2008-09 and 6.5 per cent in 2009-10.
3.38 The share of
capital expenditure in the total expenditure of the Union Government declined
from 22.8 per cent in 2004-05 to 10.2 per cent in 2008-09 and has remained in
the range of 11 per cent to 13 per cent since then. Correspondingly, the
revenue expenditure increased to 89.8 per cent in 2008-09, and thereafter
declined only marginally, despite expenditure tightening measures. As a ratio
of GDP, the revenue expenditure of the Union Government increased from 11.9 per
cent in 2004-05 to 14.1 per cent in 2009-10 and is estimated at 12.2 per cent
in 2014-15 (BE). The major components of revenue expenditure comprising
subsidies, interest payments, defence expenditure, pay and allowances and
pensions are briefly analysed in the following paragraphs.
Major Subsidies
: Pay and Allowances and Pensions
3.46 Pay and
allowances of Union Government employees more than doubled between 2007-08 and
2011-12, from Rs.74, 647 crore to Rs.166, 792 crore due to the implementation of
the Sixth Central Pay Commission recommendations( Including Defence Services).
As a ratio of GDP, it jumped from a little over 0.9 per cent in 2007-08 to 1.2
per cent in 2008-09 and about 1.4 per cent in 2009-10 on account of both pay
revision and payment of arrears. However, it moderated to a little over 1 per
cent in 2012-13.
3.47 As in the case of
salaries, expenditure of the Union Government on pensions, which had declined
to less than 0.5 per cent of GDP in 2007-08, increased to about 0.9 per cent of
GDP in 2009-10 due to the impact of revision in pensions. Subsequently, it came
down to 0.7 per cent in 2010-11 and is estimated at 0.6 per cent in 2014-15
(BE).
3.48 Expenditure on
salary, pensions and interest payments together accounted for 5.67 per cent of
GDP in 2004-05 but declined marginally to 5.56 per cent of GDP in 2009-10, with
the rise in expenditure on salaries and pensions being more than compensated by
the decline in interest expenditure. These expenditures declined further to 4.9
per cent of GDP in 2012-13.
Revenue Expenditure
: Pensions
6.34 Pensions are
another committed liability which has been fully provided for in our
assessment. The assessment of pensions is based on the growth rate of pension
expenditure obtained from past data. The year-on-year growth of pension
expenditure has shown volatility, with growth declining to a low of 0.42 per
cent in 2002-03 and increasing to a high of 70.46 per cent in 2009-10. Given
these fluctuations, it is not appropriate for us to take a long-run trend
growth rate for this expenditure as a norm for assessment. It would be more
appropriate to use the observed growth in the recent past. However, a potential
fiscal liability may arise in the future with the introduction of the ‘one rank
one pension scheme’ for Defence Services. The Budget 2014-15 has also made an
additional allocation for this scheme, which is reflected in the increase in
the growth of pension expenditure to10.67 per cent over the 2013-14 (revised
estimates) growth of 6.62 per cent. While the Ministry of Finance projects an
increase in pension payments by 8.7 per cent in 2015-16, a 30 per cent increase
is expected in 2016-17 on account of the impact of the Seventh Pay Commission,
followed by an annual growth rate of 8 per cent in subsequent years. Pension
expenditures between 2011-12 and 2014-15 have grown on a year-on-year basis at
the rate of 9.35 per cent per annum. We are of the view that annual revisions
in the Dearness Allowance and annual accretions in the number of pensioners and
the corresponding pension obligations can be covered by this growth in pension
expenditure during our assessment period.
Defence Revenue Expenditure
6.35 Revenue
expenditure on defence has grown at an annual rate of 11.21 per cent between
2001-02 and 2012-13 and at the rate of 10.1 per cent between 2008-09 and
2012-13. In its submission to the Commission, the Ministry of Defence argued
that there has been a decline in the defence expenditure-GDP ratio over the
years and defence expenditure allocation in the Union budget needs to be
increased to expand the acquisition of arms and improve defence preparedness.
The Ministry pointed out that it has not been able to make necessary
procurements because of the constraint of funds and large amounts of committed
expenditure. The Ministry also mentioned that a substantial part of the defence
capital budget went into meeting committed expenditures. The Ministry of
Finance has also highlighted the need to increase defence outlays in order to
modernise and maintain defence assets and to finance defence acquisitions.
Accordingly, its projections have provided for an increase in defence revenue
expenditure (including salaries) of 30 per cent in 2016-17 which will
incorporate the Pay Commission impact, with a stable growth rate of 20 per cent
per annum in the remaining years.
Fiscal Consolidation:
Assessment and Issues
14.48 Our review shows
that, at an aggregate level, States made significant improvements in complying
with the FRBM targets prescribed by the FC-XII and FC-XIII. In the pre-crisis
period, fiscal consolidation at the State level was aided by a number of
factors, including implementation of state-level fiscal responsibility acts,
debt waiver and restructuring recommended by Finance Commissions, and
improvement in revenues on account of buoyancy of Central taxes and
introduction of value-added tax (VAT) at the state level. Despite States
experiencing pressure on their fiscal balances in the post-crisis period due to
lower buoyancy of Central taxes and increased expenditure commitment due to the
implementation of the recommendations of Pay Commissions, they largely
continued to comply with the FRBM targets.
Pay and Productivity
17.23 Wages and
salaries constitute a significant portion of the committed liabilities of both
the Union and States. Periodic revisions based on the recommendations of the
Pay Commissions of the Union, with States following suit, have contributed to
rising revenue expenditure. For States in particular, the fiscal impact of a
pay revision is severe, as the share of salary expenditure in their total
revenue expenditure is substantially larger than in the case of the Union.
Arrears in pay and bi-annual releases of Dearness Allowance compound the
burden.
17.24 Technically, the
recommendations of a Central Pay Commission are only for Central Government
employees and States are not bound to follow suit. Indeed, up to the 1980s,
States constituted their own Pay Commissions and prescribed their own pay
scales, based upon their fiscal capacity. However, since the Fifth Central Pay
Commission, salaries and allowances in States have tended to converge with
those in the Union Government and since the Sixth Central Pay Commission,
almost all States have adopted the Union pattern of pay scales, albeit with
modifications.
17.25 An internal
study by the Commission brought out the fact that the Union Government’s
expenditure on pay and allowances (including expenditure for the Union
Territories) [2 Excluding productivity linked bonus/ad-hoc bonus, honorarium
and encashment of earned leave, and travel allowances] more than doubled for
the period 2007-08 to 2012-13, from Rs. 46,230 crore to Rs. 1,08,071 crore [If
salary of defence services is included, the corresponding figures will be Rs.
73,073 crore and Rs. 1, 84,711 crore].
This increase can be
largely attributed to the implementation of the Sixth Central Pay Commission
recommendations, evident from the per employee annual salary (excluding defence
salary) increasing from Rs. 1,45,722 to Rs. 3,25,820 over this period. Moreover,
the share of expenditure on pay and allowances in revenue expenditure (net of
interest payment, pensions and grants-inaid) increased from 11.8 per cent in
2007-08 to 13.1 per cent in 2012-13. The incidence of salary expenditure is
much higher in the States than in the Union. In 2012-13, the share of
expenditure on pays and allowances of all employees in the revenue expenditure
(net of interest payments and pensions) among the States ranged from 28.9 per
cent to 79.1 per cent. Per employee (for regular employees) salary in 2012-13
across States ranged between Rs. 2,12,854 and Rs. 5,49,345. Thus, the impact of
revisions in pay scales on fiscal positions is uniformly significant, though it
varies widely across States.
17.26 Given the
variations across States and the lack of knowledge about the probable design
and quantum of award of the Seventh Central Pay Commission, we believe that it
is neither feasible, nor practicable, to arrive at any reasonable forecast of
the impact of the pay revision on the Union Government or the States. Further,
any attempt to fix a number in this regard, within the ambit of our
recommendations, carries the unavoidable risk of raising undue expectations.
17.27 Our concern is
the likely impact on overall budgetary resources, particularly of the States,
once the recommendations of the Seventh Central Pay Commission are announced
and adopted by the Union Government. All States have asked us to provide a
cushion for the pay revision likely during our award period. The Union Government’s
memorandum has built, in its forecast, the implications of a pay increase from
2016-17 onwards. The recommendations of the Seventh Central Pay Commission are
likely to be made only by August 2015, and unlike the previous Finance
Commissions, we would not have the benefit of having any material to base our
assessments and projections and to specifically take the impact into account.
We have, therefore, adopted the principle of overall sustainability based on
past trends, which should realistically capture the overall fiscal needs of the
States.
17.28 In our view, on
matters that impact the finances of both the Union and States, policies ought
to evolve through consultations between the States and the Union. This is
especially relevant in the determination of pay and allowances, where a part of
the government itself, in the form of the employees, is a stakeholder and
influential in policy making. A national view, arrived at through this process,
will open avenues for the Union and States to make collective efforts to raise
the extra resources required by their commitment to a pay revision. More
importantly, it would enable the Union and States to ensure that there is a
viable and justifiable relationship between the demands on fiscal resources on
account of salaries and contributions to output by employees commensurate with
expenditure incurred. In this regard, we reiterate the views of the FC-XI for a
consultative mechanism between the Union and States, through a forum such as
the Inter-State Council, to evolve a national policy for salaries and emoluments.
17.29 Further,we would
like to draw attention to the importance of increasing the productivity of
government employees as a part of improving outputs, outcomes and overall
quality of services relatable to public expenditures. The Seventh Central Pay
Commission, has, inter alia, been tasked with making recommendations on this
aspect. Earlier Pay Commissions had also made several recommendations to
enhance productivity and improve public administration. Productivity per
employee can be raised through the application of technology in public service
delivery and in public assets created. Raising the skills of employees through
training and capacity building also has a positive impact on productivity. The
use of appropriate technology and associated skill development require
incentives for employees to raise their individual productivities. A Pay
Commission’s first task, therefore, would be to identify the justify mix of
technology and skills for different categories of employees. The next step
would be to design suitable financial incentives linked to measurable
performance. We recommend the linking of pay with productivity, with a
simultaneous focus on technology, skills and incentives. Further, we recommend
that Pay Commissions be designated as ‘Pay and Productivity Commissions’,with a
clear mandate to recommend measures to improve ‘productivity of an employee’,
in conjunction with pay revisions. We urge that, in future, additional
remuneration be linked to increase in productivity.
Pensions
17.30 Pensions have been growing steadily, and the liability for pension
payments is likely to cast a very heavy burden on budgets in the coming years.
Some of the factors contributing to this growth are: (i) the rise in pensions
recommended by successive Pay Commissions; (ii) removal of the distinction
between people retiring at different points of time, so that all pensioners are
treated alike in their pension justifys; (iii) taking over the liability for
pensions of retired employees of aided institutions and local bodies; and (iv)
increasing longevity. The New Pension Scheme (NPS), a contribution-based scheme
introduced by the Union Government in 2004 for all new recruits after the
cut-off date, has now been adopted by all States, with the exception of West
Bengal and Tripura. This scheme has the merit of transferring future
liabilities to the New Pension Fund and factoring the current liability on a
State’s contribution from its current revenues. We urge States which have not
adopted the New Pension Scheme so far to immediately consider doing so for
their new recruits in order to reduce their future burden.
Conclusion: – The recommendations of 14th
Finance Commission are important for 7th Pay Commission. As the recommendations
of 14th FC is applicable with effect from 01.04.2015 the impact of above
mentioned recommendations will be the part of 7th CPC. Need not to say that 7th
CPC has the challenge to prepare the report in stipulated time including the
views of 14th FC.
Source Document:
http://finmin.nic.in/14fincomm/14fcreng.pdf
