There has been a spate of commentaries about how beneficial the Seventh Pay Commission mandated pay hikes – now approved by the Union government with retrospective effect – will benefit the economy. Others have cheered this with comments like, “You pay peanuts you get monkeys!” The metaphor is unfortunate, but illogical as the monkeys are already in place, only now the diet has become richer.

The high cost of wages has also slowed down intake into government, and most departments are hugely understaffed. For instance, in the Union government, the revenue collecting departments are under-strength by as much as 45.5%, health by 27.6%, railways by 15.2%. That the Ministry of Home Affairs is under-strength by only 7.2% speaks volumes about how much has gone wrong in our system. There is a saying that the main business of government is to collect taxes so that they may be spent for the benefit of all the people. Thus we see that the main business of government is now its least concern.

Robbing Peter to pay Paul?

The sheer absurdity of the logic that higher government salaries are beneficial to the economy speaks volumes of the kind of stupidity that permeates our policy thinking at high places. By this logic, if the pay hike was higher, Gross Domestic Product growth would be even higher.

But think of this in terms of money denied for critically needed infrastructure and social development such as roads, power plants, schools and hospitals. As if these don’t generate GDP growth? Higher salaries mostly benefit those who get them. Period.

This hike will benefit only central government employees for now, but all states and Public Sector Units will join the bandwagon soon (with a total 23 million employees) and members of the Confederation of Indian Industry and Federation of Indian Chambers of Commerce and Industry will hear the music louder and dance all the way to the bank at the prospect of an increase in consumption fuelled by the pay hike.

Top industry and banking analysts have given a big thumbs up to the government’s decision stating the move will “boost consumption in the economy” and lead to higher GDP growth. It is their fond hope that the pay hike combined with a continued public push towards capital expenditure will help steer the economy to higher growth levels of 8% and above.

“The pay hike of nearly Rs 1 lakh crore for government employees will give a strong boost to consumer demand and help uplift the growth of the economy,” said A Didar Singh, secretary general, Federation of Indian Chambers of Commerce and Industry.

Increased wage bill

Singh has the added benefit of being in the Indian Administrative Services in his previous avatar, and has personally too much to cheer about. But did he notice when Union Finance Minister Arun Jaitley said that an IIM-Ahmedabad study has found the “pay in the government sector is distinctly greater than that in the private sector?” Jaitley therefore thinks the hike shouldn’t cause any protests from its beneficiaries.

The 23.5% average hike in salaries of central government employees could push up the government’s wage bill, including arrears, by an estimated Rs 1.14 lakh crore in 2016-’17.

It’s not just the industry and trade lobbies that are talking about the salary hike leading to growth, even Jaitely and Communist Party of India (Marxist) leaders like Nilotpal Basu are saying the same thing. This is when 648 million Indians are estimated to live below the United Nations Development Programme stipulated poverty line. The question we all must ask is growth at whose cost? Jaitley crowing about it is akin to the head of a family who prefers to increase his spending on smoking and drinking by cutting down on the milk for the growing children.

A sum of Rs 1.8 lakh crore has been provisioned in the current budget to pay central government employees – about 10.5% of its overall expenditure. The estimated wage bill of government at all tiers is around Rs 10.4 lakh crore or about 10% of the 2013-’14 GDP.

The three levels of government together employ about 185 lakh people. While the central government employs 34 lakh, the state governments together employ another 72.2 lakh. Quasi-government agencies (including railways) account for a further 58.1 lakh, and at the local government level, a tier with the most interface with the common citizens, we have only 20.5 lakh employees.

Do we then have a big government bearing down on us? Not really. Consider this: India has 1,622.8 government servants for every 100,000 citizens. In stark contrast, the US has 7,681. The central government, with 3.1 million employees, thus has 257 serving every 100,000 population, against the US federal government's 840.

Now look at the next tier at the state level. Bihar has just 457.6 government employees per 100,000 citizens, Madhya Pradesh 826.6, Uttar Pradesh has 801.7, Orissa 1,192 and Chhattisgarh 1,174.6. This is not to suggest there is a causal link between poverty and low levels of public servants – Gujarat has just 826.5 per 100,000 and Punjab 1,263.3.

Some troubled states, or really speaking the troublesome states, actually fare far better on this score. Thus, Mizoram has 3,950.3 public servants per a 100,000 population, Nagaland 3,920.6 and Jammu and Kashmir 3,586. Bar Sikkim, with 6,394.9 public servants per 100,000 population, no state comes close to international levels.

For the most part, it’s clear that India's relatively backward states have low numbers of public servants. This means in these states government staff is not available for the provision of education, health and social services needed to address poverty. Thus, it now seems that instead of getting better government and more public servants, we are getting more expensive government.

We are now riding the tiger of a high wage enclave of government employees, who may drive consumption and hence GDP growth. It may now be difficult to get off this tiger. It’s now clearly much too big to be tamed. But can we make it work a bit more for the country?

How about increasing government revenues? The National Institute of Financial Management, a think-tank within the Finance Ministry, estimates that the black economy is equal to 75% of the GDP. That means that Rs 150-200 lakh crore due as taxes go uncollected. I have not seen the government targeting higher tax collection in specific terms. It’s high time we did so.