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Basketcase awards

Clearly, political rather than economic considerations will dictate the timing of the UPA government’s decision to implement the Sixth Pay Commission’s recommendations.

india Updated: Mar 23, 2008 21:41 IST

The political cycle is certainly alive and kicking in the Indian context. As elections draw closer, pressures are rising by the day to step up aam admi giveways to ensure that the UPA government can score at the hustings. If the Rs 60,000 crore farm loan waiver was targeted at rural vote-banks, the Sixth Pay Commission award, the report of which is likely to be submitted to the government next week, targets the urban middle-class, especially the 3.9 million-strong regular central government employees. According to reports, they are set to receive a substantial raise of up to 52 per cent of what they are getting now. The new scales are to be effective from January 1, 2006.

Clearly, political rather than economic considerations will dictate the timing of the UPA government’s decision to implement the Sixth Pay Commission’s recommendations. If the initial beneficiaries are central government employees, those employed in state governments will also demand parity in salaries. Although rapid economic growth during the last four years resulted in revenue buoyancy, the Centre’s finances are not entirely in order. Although the finance minister has claimed that there is enough fiscal headroom to meet the additional burden of Rs 20,000 crore every year, the tab will have to be picked up by the next government at the Centre (like the loan waiver).

What are the fiscal consequences of this measure? Let us take the Fifth Pay Commission’s experience for a sense of perspective. This was constituted in April 1994 and implemented in 1997 and resulted in the government’s fiscal deficit, a measure which indicates borrowings, increasing in each of the five years thereafter, hitting a peak of 9.9 per cent of the gross domestic product in 2001-02. Which is why even the official Economic Survey for 2005-06 issued a warning that “there is need to exercise caution to avoid a
repetition of a similar deterioration in the medium term”.

The Fifth Pay Commission award was considered the biggest shock to the government’s finances during the last decade. The Sixth Pay Commission’s experience is unlikely to be any different. What makes the current prospect appear more daunting is that both the Centre and state governments are committed to adhere to the discipline of fiscal responsibility legislation. With electoral pressures mounting to step up populist spending; with subsidies on oil and fertilisers likely to be higher than budgeted, where indeed is the fiscal headroom to fund the Sixth Pay Commission award this year?