Tag: Seventh Pay Commission

23 December, 2015

Arun Jaitley will abandon fiscal consolidation in next year’s budget

It’s too early to be writing about the next year’s budget as it’s more than two months away. But given the way things stand as of now a few things can be safely said.

The finance minister Arun Jaitley during the course of the budget speech in February earlier this year, had said: “I want to underscore that my government still remains firm on achieving the medium term target of 3% of GDP…I will complete the journey to a fiscal deficit of 3% in 3 years, rather than the two years envisaged previously. Thus, for the next three years, my targets are: 3.9%, for 2015-16; 3.5% for 2016-17; and, 3.0% for 2017-18.” Fiscal deficit is essentially the difference between what a government earns and what it spends.

The way things stand as of now there is no way that the finance minister can work with a fiscal deficit target of 3.5% of the gross domestic product(GDP) for 2016-2017, which is the next financial year.

Why do I say that? The Mid-Year Economic Analysis released by the ministry of finance last week hints towards the same. The nominal GDP growth for the first six months of the year came in only at 8.2%. It had been assumed to grow at 11.5% in the budget. Nominal GDP is essentially GDP which hasn’t been adjusted for inflation.

This lower than expected economic growth has led to the ministry revising the expected nominal growth for 2015-2016 to 8.2%. “Unless oil prices decline further this annual estimate of 8.2 percent would represent two successive years of substantial declines in nominal GDP growth…We estimate that real GDP for the year as a whole will lie in the 7-7.5 per cent range.,” the Mid-Year Economic Review pointed out. The real GDP is essentially GDP which has been adjusted for inflation.

In this scenario of lower than expected economic growth (as measured by the real/nominal GDP growth) “if the government sticks to the path for fiscal consolidation, that would further detract from demand,” the Review points out. Further, “consolidation of the magnitude contemplated by the government… could weaken a softening economy”. Fiscal consolidation is essentially the reduction of fiscal deficit, along the lines Jaitley had talked about in his budget speech.

What the Review is essentially saying here is that if the government continues to cut its fiscal deficit, it will have to cut down on its expenditure. And in an environment where the consumer and industrial demand isn’t really robust this may not be the best way to go about it. With overall demand not in best shape if the government also cuts its expenditure there will be a further fall in demand and in the process economic growth will slow down further.

Hence, enough hints have been dropped in the Mid-Year Economic Review to suggest that the government doesn’t plan to stick to the fiscal deficit target of 3.5% of the GDP in 2016-2017, as it had talked about at the time it presented the budget for 2015-2016.

In fact, even without taking what the Mid-Year Economic Review has to say, the numbers clearly suggest that there is no way the government can work with a fiscal deficit target of 3.5% of the GDP.

The recommendations of the Seventh Pay Commission are expected to add Rs 73,650 crore or 0.65% of the GDP in the first year, to the government’s expenditure. In line with the recommendations of the Commission, the government will pay higher salaries as well as pensions.

Also, the recommendations of the Commission come into effect from January 1, 2016. They will be implemented from April 1, 2016. Hence, arrears for the three months of January to March 2016 will also have to be paid. This is likely to amount to Rs 18,412.5 crore (Rs 73,650 divided by 4). This pushes up the total extra expenditure due to the recommendations of the Seventh Pay Commission to Rs 92,062.5 crore (Rs 73,650 crore plus Rs 18,412.5 crore).

Over and above this, The Financial Express reports that the Railways has requested the government to fund the extra money it would have to spend in order to meet the recommendations of the Seventh Pay Commission. This is estimated to be Rs 28,450 crore. The Pay Commission in its reports expected the Railways to meet this extra expenditure out of its own revenues. But with the revenues of the Railways not growing as fast as they were expected to, this may not happen now.

Further, arrears of the first three months of 2016 will also have to be paid by the Railways and this will push the total extra expenditure of the Railways to be funded by the government to Rs 35,562.5 crore (Rs 28,450 crore plus Rs28,450 crore divided by 4).

Hence, the total extra expenditure of the government due to the recommendations of the Seventh Pay Commission will come to Rs 1,27,625 crore (Rs 92,062.5 crore plus Rs 35,562.5 crore). Add to this the extra expenditure due to the implementation of one rank one pension which is expected to come to Rs 10,000 crore and we are looking at an extra expenditure of close to Rs 1,40,000 crore.

Also, as I had pointed out in yesterday’s column food and fertilizer subsidies of greater than Rs 1,00,000 crore have not been paid. Once all these factors are taken into account it becomes very clear that there is no way the government can come up with a fiscal deficit number of 3.5% of the GDP.

So, what is the solution for the government, given that this is big money being talked about here? Rest assured some accounting shenanigans will be resorted to with some expenditures (like the payment of subsidies) being postponed. Over and above this, the government needs to shut down loss making public sector enterprises and sell the assets these public sector enterprises have been sitting on for many years now.

The Business Standard reports that the government is planning to raise the rate of service tax from the current 14% to 16%. This is line with the recommendations of the Arvind Subramnian committee which has proposed a standard goods and services tax in the range of 16.9-18.9%. As an editorial in The Financial Express points out: “Based on this year’s budgeted collections for service taxes, a 2-percentage-point hike can yield around R30,000-35,000 crore extra.” And this clearly won’t be enough.

The column was originally published in The Daily Reckoning on December 23, 2015

4 December, 2015

Rajan won’t cut interest rates before the budget

This is a column I should have written earlier this week. But given that I got busy explaining the 7.4% economic growth number, this took a backseat.

The Reserve Bank of India (RBI) presented the Fifth Monetary Policy Statement for this financial year, earlier this week on December 1, 2015. It maintained the repo rate at 6.75%. Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark to the interest rates that banks pay for their deposits and in turn charge on their loans.

In the press conference that followed the declaration of the Monetary Policy Statement, Raghuram Rajan, the governor of the RBI, said: “We are still accommodative.” What this means in simple English is that the RBI is still looking to cut the repo rate rather than raise it, if the conditions are right.

Nevertheless, it is unlikely that Rajan and the RBI will cut the repo rate any further before Arun Jaitley presents the next budget in February 2016. Why do I say that? Almost towards the end of the Monetary Policy Statement Rajan says: “The implementation of the Pay Commission proposals, and its effect on wages and rents, will also be a factor in the Reserve Bank’s future deliberations, though its direct effect on aggregate demand is likely to be offset by appropriate budgetary tightening as the Government stays on the fiscal consolidation path.”

The Seventh Pay Commission has recommended a 23.6% overall increase in the salaries of central government employees as well as the pensions of the retired central government employees. The RBI will keep a lookout for the impact this jump in salary and pension will have on inflation in the days to come.

Over and above this, the RBI feels that the impact of the Seventh Pay Commission recommendations on inflation (or what it calls direct effect on aggregate demand) will be offset by the government cutting down on its expenditure in other areas. The fear is that the increased salaries and pensions will lead to higher spending and that will lead to higher inflation.

There are multiple reasons why this is unlikely to happen. The first being that factories are currently running around 30% below capacity. Typically as demand for products and services goes up, the supply side can’t keep pace if it is operating full throttle. That is clearly not the case here. If consumer demand picks up, the supply side can easily accommodate by ramping up production.

Further, the RBI feels that the government will carry out “appropriate budgetary tightening”
to stay on “the fiscal consolidation path”. The Seventh Pay Commission recommendations as and when they are accepted, will lead to a higher expenditure for the government, everything else remaining the same.

The RBI expects that the government will not let this happen by ensuring that it cuts its expenditure on other fronts and ensures that it keeps moving towards the fiscal deficit target of 3% of the gross domestic product for 2017-2018 that it has set for itself (or what the RBI calls the fiscal consolidation path in the monetary policy statement).

While expectation is one thing, the RBI needs to make sure that the government continues moving towards the fiscal consolidation path. And that will only be possible to figure out once the budget for the next financial year 2016-2017 is presented in February 2016.

Given this, the RBI is unlikely to do anything on the interest rate front before it gets a dekko at the next financial year’s budget document.

Another important point that the RBI made in the monetary policy statement was regarding the efficacy of monetary policy. As it pointed out: “Since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 basis points has been transmitted by banks. The median base lending rate has declined only by 60 basis points.” One basis point is one hundredth of a percentage.

What this means is that while the RBI has cut the repo rate by 125 basis points since the beginning of 2015. The banks in turn have managed to cut less than half at 60 basis points. Why is that? A major reason for this is that bad loans have been piling up at banks. The overall bad loans of banks as of September 2015 stood at Rs 3,36,685 crore. As a recent research note by CARE Ratings points out: “Gross NPAs [i.e. bad loans] stood at Rs 3,36,685 crore in Q2-FY16[as on September 30, 2015] increasing by Rs 71,129 crore over Q2-FY15[as on September 30, 2014]. This indicates growth of 26.8% in gross NPAs across 37 banks.”

The public sector banks are facing more bad loan problems than their private sector counterparts. Bad loans eat into profit. Hence, in order to maintain their profit at a certain level, the public sector banks need to maintain their interest rates at high levels. And they have not been able to cut interest rates by as much as the RBI has cut the repo rate.

Further, given that the public sector banks haven’t cut interest rates by as much as the RBI wants them to, the private sector banks haven’t needed to cut interest rates either at a rapid rate.

Given this, unless the bad loans problem of public sector banks is solved, interest rates are unlikely to keep coming down at the rate the RBI wants them to. As the RBI acknowledged: “The on-going clean-up of bank balance sheets will help create room for fresh lending.”

The other issue here is that of small savings schemes which tend to offer slightly higher interest rates than bank fixed deposits. Given this, unless the interest rates on small savings schemes come down to the level of fixed deposits, banks can’t rapidly cut the interest rates on their fixed deposits. If they do this, they are likely to see money deposited with them moving to small savings schemes.

If banks can’t cut their fixed deposit rates, they won’t be able to cut their lending rates. The RBI was hopeful that “The Government is examining linking small savings interest rates to market interest rates. These moves should further help transmission of policy rates into lending rates.”

The column originally appeared on The Daily Reckoning on December 4, 2015

26 November, 2015

Will the 7th Pay Commission recommendations lead to higher inflation?

The advantage of writing regularly is that one can dwell into great detail on issues of national economic importance. Hence, this is the fourth column on the recommendations of the Seventh Pay Commission this week.

When I started writing regularly in the media nearly 12 years back, the communication with the readers was largely one way. One wrote a piece and then forgot about it. There was no feedback coming in from the readers. There was no way of figuring out whether something one had written had actually been read. If it had been read then what had the readers thought about it?

Some feedback came from the colleagues, if they did read, what one had written (normally they didn’t). The bosses did give feedback once in a while, especially if they didn’t like something one had written.

But now with the advent of the social media, feedback (both good and bad) keeps coming in all the time, and questions keep getting asked. Also, if readers like something they share it. This gives some idea of what the readers are actually interested in. There is constant communication with the readers these days and that’s a good thing.

One of the questions that I recently got asked on Twitter was: “Will the 7th Pay Commission recommendations lead to higher inflation?” As I have mentioned multiple times this week, the Pay Commission recommendations will lead to an increased spending of Rs 1,02,100 crore by the government, to pay higher salaries of central government employees and higher pensions of retired central government employees.

How will this lead to inflation? A part of this increase in salary and pensions will be spent to buy goods and services. As this money chases the same amount of goods and services, prices will go up. This logic seems very straightforward—as straightforward as saying, a cut in interest rates leads to people and companies borrowing more, which is something one hears all the time.

In fact, that is how things played out in the aftermath of the Fifth as well as Sixth Pay Commissions, once their recommendations had been accepted. The higher salaries and pensions led to a higher consumption which led to higher inflation.

As Crisil Research points out in a recent research note 7th Pay Commission: A non-inflationary boost to consumption and investment: “During the Fifth Central Pay Commission(CPC) payout, overall inflation rose by 657 basis points[one basis point is one hundredth of a percentage] on-year in fiscal 1999, while non-food inflation in the same year rose only 141 boints. During the Sixth CPC payout years, however, overall inflation rate rose by 611 basis points on-year between fiscals 2009 and 2010. But this time the increase in non-food inflation was higher and lagged – up 492 bps during fiscals 2010 and 2011.”

So will this phenomenon play out this time around as well? A major reason for inflation the last two times was the fact that the Pay Commission increases came much after they were due. The Sixth Pay Commission increase was due from January 2006. But the report was submitted only in March 2008 and accepted by the government in August 2008. Hence, arrears had to be paid and they were paid only in 2008-2009 and 2009-2010.

This meant that people suddenly ended up with a lot of money in their hands, as payments were made. As Crisil Research points out with regard to the Sixth Pay Commission: “Large arrear payments coincided with the rapid rise in rural wages adding to core inflationary pressures then. These two factors are expected to be absent, this time.”

This time the salary increases are due from January 2016. Unlike the last time, the Pay Commission recommendations have come in before the due date. Also, chances are that the government will implement these recommendations starting from April 2016, the next financial year. Given this, only a limited amount of arrears will have to paid, meaning that people will not suddenly end up with a lot of money in their hands, as they had last time around.

Another factor that needs to be kept in mind is that most factories are not running full steam at this point of time. As Reserve Bank of India governor, Raghuram Rajan, recently pointed out, most factories are running 30% below capacity as of now.

This means that factories can easily ramp up supply if the demand goes up due to higher consumer spending, without leading to higher prices. Typically, if factories are running full steam, a rise in demand cannot be matched immediately with a rise in supply and that leads to prices going up. But that sort of scenario is unlikely to playout as of now.

Over and above this, as and when the recommendations of the Seventh Pay Commission are accepted by the central government, pressure will mount on state governments to increase the salaries and pensions they pay as well. The state government increases won’t happen overnight and will take some time to happen.

And this will allow the inflation due to increased demand, if any, to spread out over a period of time.

As Crisil Research points out: “State governments – which have more employees than the Central government – tend to implement these with a lag. Therefore, while there is a push to consumption demand, it takes place over time allowing supply-side factors to adjust wherever possible.”

The column originally appeared on The Daily Reckoning on Nov 26, 2015

26 November, 2015

Will damages of the 7th Pay Commission be as bad as the Sixth?

This is the third time this week I am writing a column around the Seventh Pay Commission recommendations. In this column I would like to address the total financial impact of the recommendations of the Seventh Pay Commission.

As I have mentioned in the earlier columns, the Commission has recommended an overall increase of 23.6% in the salary of the central government employees and the pensions of those who have retired from central government jobs. This is likely to cost the government Rs 1,02,100 crore in 2016-2017, the Commission has estimated.

The report estimates that this increase will work out to 0.65% of the gross domestic product (GDP) in 2016-2017. In comparison, the awards of the Sixth Pay Commission had worked out to 0.77% of the GDP.

The question is how much will it impact the finances of the central government, if the recommendations where to be accepted. First and foremost Pay Commission recommendations are usually accepted. And there is no reason that they won’t be accepted this time around as well.

Further, it is very difficult to estimate by exactly how much the government finances will be affected , given that there is no way of figuring out what the budget makers of the government are thinking. Nevertheless, it is safe to say that the government will have to figure out a way of either increasing its earnings or cutting down on its expenditure, in order to be able to finance this expenditure (as we saw in yesterday’s edition of The Daily Reckoning).

If we look at the budget numbers between 2005-2006 and 2015-2016, the government expenditure has gone up at the rate of 13.4% per year. The government receipts (i.e. the tax and the non-tax revenue of the government less its borrowings) have gone up at the rate of 13% per year. The government expenditure has been going up on a larger base at a faster rate.

Of the extra Rs 1,02,100 crore the government will have to spend, Rs 73,650 crore will have to be borne on the general budget and the remaining on the railway budget. Assuming that the trend of the last ten years will continue in 2016-2017, with an extra expenditure of Rs 73,650 crore, the fiscal deficit of the government is likely to jump to 4.5% of the gross domestic product (GDP) (I will spare you the Maths here).

In 2015-2016, the government has targeted a fiscal deficit of 3.9% of the GDP. Fiscal deficit is the difference between what a government earns and what it spends. And this isn’t a good thing, given that the government is trying to achieve a fiscal deficit of 3.5% of the GDP by 2016-2017 and 3% of the GDP by 2017-2018.

Long story short—the government cannot continue operating the way it currently is. It will have to find out ways to cut its expenditure on other fronts as well increase its revenues. If it does not do that there is no way it will be able to finance the extra spending on salaries and pensions without managing to increase its expenditure as well as the fiscal deficit in the process. And that won’t be a good thing for the Indian economy.

A higher fiscal deficit will have to be financed out of higher borrowing by the government. This will leave lesser amount of money for the private sector to borrow and in effect push up interest rates. And that is something the government won’t want to do.

In fact, the impact of the recommendations of the Seventh Pay Commission don’t end at the central government level. As soon as the central government accepts the recommendations of the Seventh Pay Commission, demands will start for the state governments to increase their salary and pension payouts as well.

That is how things had played out after Sixth Pay Commission recommendations were accepted. The Sixth Pay Commission was due from 2006 onwards, but the Pay Commission report was submitted only in March 2008. The recommendations were accepted in August 2008. Given this, the government had to pay arrears to the employees.

These arrears were paid in 2008-2009 and 2009-2010, with a split of 40:60. This pushed up the fiscal deficit of the central government big time. The fiscal deficit in the year 2007-2008 had stood at 2.54% of the GDP. In 2008-2009, it hit 5.99% and then climbed to 6.46% of the GDP in 2009-2010 (as can be seen from the accompanying table).

There were other reasons as well for this massive jump in the fiscal deficit, from debt of farmers being waived off, to the United Progressive Alliance government getting into the pump priming mode in the aftermath of the financial crisis which started in mid-September 2008, to the expansion of the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) to all districts of the country from the original 200 districts.

Year	Fiscal deficit of the central govt(% of GDP)	Combined fiscal deficit of the state govts (% of GDP)	Total
2007-2008	2.54	1.51	4.05
2008-2009	5.99	2.39	8.38
2009-2010	6.46	2.91	9.37
Source: http://planningcommission.nic.in/data/datatable/1203/table_27.pdf

After the central government, the state governments also had to start raising salaries as well as pensions. The Seventh Pay Commission had commissioned a study by IIM Calcutta to “ascertain the fiscal impact of the previous Commissions’ awards on the states”.

The study found that: “that a significant number of States follow the recommendations of the Central Pay Commission. Equally, there is significant plurality of States that design their own pay awards based on the recommendations of their own State Pay Commissions, which of course do consider the recommendations the Central Pay Commission.”

Hence, the salaries of the employees of the state government employees also went up after the Sixth Finance Commission recommendations were accepted by the central government. This led to the combined fiscal deficit of the states jumping from 1.51% of the GDP in 2007-2008 to 2.91% of the GDP in 2009-2010.

The combined fiscal deficit of the centre as well as the states jumped from 4.05% of the GDP to 9.37% of the GDP. Things started to improve from 2010-2011 onwards. As the Seventh Finance Commission report points out: “The empirical analysis conducted indicates that the macroeconomic impact on States’ finances tends to taper off in two years in most cases.” So, government finances were impacted for two years.

Will a similar scenario play out this time around as well? While the fiscal deficits of the centre as well as the states are likely to jump up, the quantum of the jump may not be as much, because this time the chances of arrears having to be paid are low (at least in case of the central government).

As the Seventh Pay Commission report points out: “The awards of the previous Pay Commissions, both V as well as the VI, involved payment of arrears…However, Seventh Central Pay Commission recommendations entail, at best, payments of marginal arrears.”

This time around the chances are that the recommendations of the Commission will be implemented from April 1, 2016, onwards, and hence will involve payment of marginal arrears. In case of state governments, the arrears will depend on how soon the state governments agree to salary increases.

So can we safely say that the damages of the Seventh Pay Commission will not be as bad as the damages of the Sixth Pay Commission, which screwed government finances for two years? The fact is that the Seventh Pay Commission has recommended one rank one pension for central government employees as well. And that remains the joker in the pack.

The column originally appeared on The Daily Reckoning on Nov 26, 2015

24 November, 2015

Who is a Babu?

This is a slightly different piece from the ones that I usually write for The Daily Reckoning newsletter. In this piece I will try and define a babu.

So who is a babu? More than coming up with an exact definition, it is easier to just visualise him, in a cynical sort of way. He is the quintessential government employee, not reaching office before 11PM, sitting on a chair all day and not working, taking regular breaks for having cups of tea under the banyan tree outside his office, with a constant eye on the watch, so that he can leave office the moment it strikes 5PM (or may be even 4PM in some cases). Oh and of course, to do any work the babu needs to be paid a bribe (how could have I missed out on that).

The Bangla singer Nachiketa has a fantastic song defining a babu, it’s called aami sorkari karamchari (I am a government employee). Those who do not understand Bangla can listen to the Hindi version of the song by the same singer here. I guess a better song has not been written stereotyping the government in India, since this song came out sometime in the 1990s.

Now to get back to the topic at hand. So we have some sort of a definition of who is a babu, in place. But why am I talking about babus today? The Seventh Pay Commission has recommended a 23.6% overall increase in the salaries of central government employees and the pensions of retired central government employees, who are typically referred to as babus.

This has led to a lot of outrage on the social media in particular and the media in general. People have raised a lot of rhetoric around whether lazy government employees need to be paid so much when they cannot seem to get any work done. Some people have asked why do salaries of corrupt babus need to be increased. Still others have asked, why can’t the government decrease its size and not need to pay so much to so many babus.

In fact, the Seventh Pay Commission report has some data which will surprise you on this front. At least, it did surprise me. As on January 1, 2014, the central government employed a total of 33.02 lakh people against a sanctioned strength of 40.49 lakh.

Of the 33.02 lakh employees, 9.80 lakh were employed by the ministry of home affairs. These primarily include individuals working for the central paramilitary forces like central reserve police force (CRPF), Border Security Force (BSF) etc. The Railways employed another 13.16 lakh. The Defence employed another 3.98 lakh in civilian positions. And the Postal department employed 1.98 lakh. Though there is some controversy here.

The data obtained by the Seventh Pay Commission puts the number of employees working for India Post at 1.98 lakh. The expenditure budget of 2014 puts the number at 4.6 lakh. And data from Directorate General of Employment and Training suggests that the number of postal employees is at 2.09 lakh.

In fact, the same variation is seen when it comes to the number of people employed in defence in the civilian position. The expenditure budget of 2014 suggests 34,813, the DGET 3.75 lakh and the data obtained by the Seventh Pay Commission puts it at 3.98 lakh. I wonder how can there be such a huge difference between different estimates.(Regular readers of The Daily Reckoning readers will also appreciate here, how difficult it is to write anything that is data oriented in India). Anyway, getting back to the matter at hand, for the sake of this analysis we will stick to the numbers that the Seventh Pay Commission has obtained.

If we were to leave out those employed by railways, post and ministry of home affairs, and those working in defence in civilian positions, the central government employs just 4.18 lakh people and that is clearly not huge in a country of more than 120 crore people.

Also, people working for the central paramilitary forces and even defence in civilian positions, clearly cannot be considered to be as babus, in the strictest sense of the term.

The India Post employees can possibly be considered as babus. If we add their numbers, then we get a 6.08 lakh central government employees who can be labelled as babus. While, the railway employees are not exactly known for their efficient way of working, but railways is an essential service and you need people to run it.

As the Seventh Pay Commission report points out: “In fact the number of personnel working in the Secretariat of ministries/departments, after excluding independent/statutory entities, attached and subordinate offices will add up to less than thirty thousand6. The ‘core’ of the government, so to say, is actually very small for the Government of India, taken as a whole.”

While it is not easy to compare one government with another, the Seventh Pay Commission does make an attempt to do that. As the report points out: “Available literature indicates that the size of the non-postal civilian workforce for the US Federal Government in the year 2012 was 21.30 lakh. This includes civilians working in US defence establishments. The corresponding persons in position in India for the Central Government in 2014 was 17.96 lakh8. The total number of federal/Central Government personnel per lakh of population in India and the US works out to 139 and 668 respectively.”

What these data points clearly tell us is that the Indian government is not big at the central government level, at least. There is a “concentration of personnel in a handful of departments” like home ministry and railways ministry. The department of revenue is other big employer, the report points out.

So what can we learn from this? First and foremost that the central government may have babus who are not efficient at work, but it doesn’t have too many of them. A major part of the increase in salaries recommended by the Seventh Pay Commission will go to the paramilitary forces, railways and defence personnel.

So a smaller government in terms of number of people at least at the central government may not be possible. Now this realisation has important repercussions.

The Seventh Pay Commission’s recommendations will cost the government Rs 1,02,100 crore. Hence, even though the number of people is not huge, the salary plus pensions bill is huge, given the earning capacity of the government. And if the government continues to work in the way it currently is, there is a very good chance that this increased expenditure will end up screwing up the finances of the government like it had after the recommendations of the Sixth Pay Commission had been accepted in August 2008.

Given this, the government needs to work in a very efficient way. It needs to get rid of loss making public sector enterprises like MTNL and Air India. It also needs to raise more money by strategically selling its stake in other profit making public sector enterprises. It needs to make an inventory of all the land held by public sector enterprises and look at various ways of monetising it.

Further, steps need to be taken to increase the tax base, instead of taxing the same set of people over and over again. Domestic black money needs to be concentrated on. Right now the government clearly does not earn enough to finance the increase in salaries and pensions recommended by the Central Pay Commission.

Also, with people living longer and other developments like one rank one pension (which the seventh pay commission has recommended for all central government employees), the pension bill of the government is set to shoot up. In this scenario it is important that the government move the sections of the government still on the defined-benefit pension to defined-contribution pension.

The Seventh Pay Commission has also recommended a minimum pay of Rs 18,000 with effect from January 1, 2016. The allowances and other facilities will be over and above this pay. At lower levels the government pays much more than the private sector. And this explains to a large extent why you hear engineers, PhDs and doctors applying for jobs at lower levels of the government. This is an anomaly that needs to be set right. But I am not sure how determined this government (or for that matter any other government would have been) is to challenge the existing way of doing things.

The column originally appeared on The Daily Reckoning on Nov 24, 2015