What will be the Sixth Pay Commission’s impact on national income? In the short run, both the nominal gross domestic product (GDP) as well as the government’s contribution to it will rise. So, India could boast of a higher growth rate than is commonly assumed. We saw something similar happen a decade ago.
Illustration: Jayachandran / Mint
The reason is rather simple. Since there is no market price for public sector output, the standard national income accounting practice is to measure government output by cost of production (or wages paid). So the pay commission, by increasing the cost of government services, will pump up GDP growth. The Fourth and Fifth Pay Commissions “hiked” nominal GDP by 0.67% and 1.23%, respectively. The Sixth Pay Commission will raise it by 0.40%.
But this is only a part of the story. The Central government accounts for 30% of public sector employment. If state governments follow suit with a similar pay hike, then national income may be pushed up by 1.5%.
At one level, it’s an accounting mirage. Say, you open a coffee shop and pay each employee Rs1,000 a day. Hiring the first, second and third employee increases your revenues to Rs3,000, Rs5,000 and Rs5,500, respectively. Should you hire the third employee? No, because the marginal cost (Rs1,000) is more than marginal revenue (Rs500). This basic principle of economics states: employees, machines and resources should be employed to the point where marginal cost equals marginal benefit.
There are millions of government employees — guards, personal assistants, managers, coal miners and teachers, for example. Has their marginal productivity increased by 21% (which is the average pay hike promised by the government) in the decade since the Fifth Pay Commission?
We doubt productivity in the government sector has increased in proportion to the salary hike. So, government employees will receive money without having produced an equivalent value of real goods. And when these employees consume more real goods, thanks to bigger pay cheques, inflation will rise.
Successive pay commissions have asked the government to improve productivity and streamline staffing in tandem with the suggested pay hikes. But these are political hot potatoes. So only the convenient part of the recommendations are implemented; and so it is this time too.
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