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A few get pay hike and the majority suffers

 

The government remains the best employer. The seventh pay commission increase of salaries by 23.5 per cent testifies it.

It benefits approximately two crore people – less than two per cent of the population – working with the central and state governments or pensioners. Each such revision has resulted in more inflation for the rest of the 98 percent population. They do not have a built in system for income rise to counter inflation but as government staff salaries increase they are forced to bear the brunt.

The pay hikes burden the government by Rs 1.02 lakh crore additional expenses and increases fiscal deficit by 0.65 per cent. In short, the government would be left with less money for its developmental and welfare programmes.

A moot question is why should there be a whopping decadal pay revision for such a minuscule numbers. The simple reason is wages have to match the rising prices so that the basic needs of a worker and his family – food, education, medical care, recreation, as per the norms laid down by 15th Indian Labour Conference in 1957- could be met. An added reason is said to be higher wages spurs growth, though that is often debated.

The workers in public and private sectors were right in having the norms set for wage-price linkage. This was the only hedge they have. But should a government or country accept that as the basic norm? It should not. But India has always seen spiraling inflation except for 1996-2004, a typically non-Congress regime. It was the era of coalition – United Front, conglomerate of left and regional parties; and National Democratic Alliance headed by Atal Behari Vajpayee.

Post 2004 again the era of severe price rises returned. In 2010, the sixth pay commission compensated it with 54 per salary hikes. It almost lead the government to bankruptcy and leading to an era of levying cess of several types – education, road, flight, coal and many more. Each new tax and cess like the supreme court-ordered green tax further adds to inflationary pressure.

It means the Indian economic system heavily depends on the factor of inflation. Rather simply it accepts inflation as a part of the system – something strange and irrational. It also shows that there is no social control on prices of goods. It is being decided and raised, the system says revised, continuously without a rationale. This has led some monopolists to earn staggering profits of 80 to 142 percent a year.

That shows neither the government nor the society, except for the consumers, has any concern for the rising prices. The system possibly is being dictated by some who are thriving as the system collapses under inflationary pressure.

The argument that more cash in hand is likely to result in higher consumption and spending on assets is only partially correct. Food inflation has already eaten up major part of the gains. Those who expect it to boost some industrial production possibly are not aware that despite sixth pay panel recommendations resulting in huge arrear payments, the growth only moderated. This time it is unlikely to give very large payment of back wages as the recommendations are prospective of January 2016.

The net result may be a huge burden on the government. The tax accrual too is likely to be less than 2010 as the income tax rates either would be lowered or the minimum taxable limit hiked. So a sales pick-up is unlikely because employees would like to save a large part of their benefits to the increased cost of primary and higher education of their children apart from food. It may also dampen the prospects of the expectations of swelling the indirect tax kitty.

The premise that inflation could boost wages and subsequently spur the economy is based apparently on facile logic.

On the contrary the society suffers on many counts. The wages in public sector organizations in India rise to match the government wages.

The private sector largely finds it unbearable. Wage bill increases of companies are often not compensated by their incomes, particularly in subdued markets. It takes to the subterfuge of raising wages of a few employees and matching the “loss” by sacking many others. Indirectly high wages lead to higher unemployment. Pay in the private sector is contributing towards massive inequalities in society.

It can be understood by an instance from the US. Signs of a nascent pickup in U.S. worker pay proved fleeting as wages and salaries climbed in the second quarter at the slowest pace on record, says Bloomberg in a recent report. Wage Growth in the United States averaged 6.33 percent from 1960 until 2015, says the U.S. Bureau of Economic Analysis.  In the 12 months ended June, US wages and salaries were up 2.1 percent compared with a 2.6 percent year-over-year gain in the first quarter.

It is one of the lowest in the world. So is its inflation. The US inflation peaked over 2 percent after Lehman Brothers induced 2008 economic collapse. It has now plateaued to 0.2 per cent. This has led to increased job growth, according to the US labour department.

This is the lesson for India. There is now a suggestion that there should be a permanent pay commission. Again this is flawed logic drawn from the premise that the country cannot get rid of its inflationary cycles.

History of course shows that to be true. But with a government having a new vision this needs to be belied. A country like the US has become a super power on the strength of its low inflation. Prime minister Narendra Modi has established the country’s international recognition. His efforts have brought large FDI during a short span – $ 34.9 billion in 2014-5 and if Financial Times of London is to be believed $ 31 billion in the first half of 2015-16.

It shows the country has strength. If inflation is checked and so are wages it can become the most desired investment destination for the world. The present hikes are not be grudged. But the nation needs to learn the long-term cost of such a policy and reframe it to give its future generation a perennial solution to many of the woes that inflation entails, including poverty.

 

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