7TH PAY COMMISSION REPORT

Views of Important Stakeholders on Central Government Personnel

3.12 The Commission has received representations/memoranda on issues that broadly involve the strength, deployment and expenditure on Central Government personnel.

3.13 Joint Consultative Machinery-Staff Side: On the size and nature of government, the JCM-Staff Side has made the following submissions to the Commission:

i. Majority of Central Government employees (88 percent) are either industrial or operational staff and therefore the contention that wage bill of the Central Government is for administrative purpose is ill conceived.

ii. Existence of a large array of personnel employed by the government through contract, pushing a major segment of government functions into informal sector.

iii. Expenditure on pay and allowances over the years as a percentage of revenue receipts
and revenue expenditure has been falling.

Focus Areas of the Commission

3.14 Based on the data provided by the ministries/departments the Commission has examined and analysed trends with regard to five focus area:

1. Size of government- Sanctioned Strength and Persons in Position
2. Personnel in Position, in terms of categories
3. Personnel in Position, recruited before and on or after 01.01.2004
4. Age Profile of Central Government Personnel as on 01.01.2014
5. Expenditure on Pay and Allowances of Central Government Personnel

3.15 There is a separate Section devoted to Contractual Manpower in the Central Government.

3.16 To strike a balance between the two ends of aggregation and details, in addition to the broad totals, particulars of the nine largest ministries/departments plus others has been included in each Section. In addition, wherever appropriate, instances of some outliers in each category have been brought out.

Size of Government- Sanctioned Strength and Persons in Position

3.17 The Commission has received data from ministries/departments on the strength of personnel in the government at three points of time viz., 01.01.2006, 01.01.2010 and 01.01.2014. The data on strength of personnel in government has been reviewed and material from successive CPC Reports have been put together to bring out the position as has evolved
over time.

Defining a Central Government Employee: 7th CPC Report

Defining a Central Government Employee

3.10 The III CPC had attempted to define who is a Central Government employee. It stated that “All persons in the civil services of the Central Government or holding civil posts under that government and paid out of the Consolidated Fund of India.”

3.11 The Commission is in broad agreement with what has been stated in the III CPC Report.

For the purposes of its work, the Commission defines Central Government employees as all persons in the civil services of the Central Government or holding civil posts under that government and paid Salaries out of the Consolidated Fund of India. This however, does not include such persons appointed to serve Parliament or the Union Judiciary.

Analysis of Central Government Personnel: 7th CPC Report

Analysis of Central Government Personnel: 7th CPC Report

3.1 The Seventh CPC has been mandated by its terms of reference to examine, review and recommend changes in the principles that govern the emoluments structure for a number of employees’ categories viz., Central Government employees, those belonging to All India Services, personnel of Union Territories, officers and employees of the Indian Audit and Accounts Department, Members of Regulatory Bodies, Officers and employees of the Supreme Court and personnel belonging to the Defence Forces. The focus of the Commission is primarily on personnel serving the Central Government. Therefore an essential aspect of the work of the Commission involved obtaining a clear picture of the size, composition and profile of Central Government personnel.

Background

3.2 The III, IV and V CPCs undertook an analysis of the composition of Central Government personnel. The III CPC, in its Chapter titled ‘Employment under Central Government,’ analysed the distribution of posts among major departments; distribution of posts in terms of classes-I, II, III and IV (as was classified at that time); distribution of posts among permanent and temporary and distribution of employees according to pay ranges.

3.3 The IV CPC, in a separate Chapter titled ‘Civil Employment under the Central Government,’ analysed the strength of the civil Central Government broadly in terms of (a) distribution of posts in terms of major departments (b) distribution of posts in terms of groups- Group `A’, Group `B’, Group `C’ and Group `D’ (c) distribution of industrial workers in terms of major departments and (d) distribution of permanent and temporary posts by major departments.

3.4 The V CPC in its Chapter titled ‘Size of employment under Central Government’ analysed the strength of the civil Central Government broadly on the lines of the IV CPC, adding greater details. It concluded inter alia that the statistics did not provide pointers to whether “the bureaucracy as a whole is ‘bloated’ or not.” It did however note that the rate of growth had been arrested and that the government, if it had the will, could reduce manpower. It also supported the trend towards an officer oriented administration.

3.5 The VI CPC Report did not carry a separate analysis of Central Government personnel.

Approach of this Commission

3.6 The Commission decided to elicit data relating to personnel from all ministries/departments so as to get a comprehensive view on personnel serving the government in terms of certain broad attributes. To do so data on personnel position over time was sought along with their age profile. Further, in the context of implementation of the National Pension System w.e.f. 01.01.2004, disaggregation in terms of those recruited before or after this event was sought.

Information was also obtained regarding expenditure on pay and allowances of personnel working in the Central Government; extent of deployment of contractual staff and training and skill development of personnel. The data template in which information was sought is at Annex A, B, C, D1 and D2.

3.7 To ensure integrity of data the Commission validated the data on personnel with reference to other data sources in the government on personnel viz., - (a) Expenditure Budget, Volume 1, Annex 7 of the Ministry of Finance and (b) Census of government employees prepared by the Directorate General of Employment and Training, Ministry of Labour and Employment.

While undertaking this exercise infirmities in data as and where noticed were reconciled in consultation with the ministries/departments. With regard to expenditure on personnel the ministries/departments were requested to furnish this data after having it vetted by their Chief Controller of Accounts.

Scope of Analysis

3.8 Based on the data received, an analysis has been undertaken by the Commission to bring out the existing position on Central Government civilian personnel and the pointers it provides to policy makers in the government.

Analysis of Central Government Personnel 7th CPC Report

3.9 The Commission has obtained data regarding 33.02 lakh Central Government civil personnel, in Civil Ministries/Departments, Defence (Civilians), Posts and Railways5. The analysis includes 0.77 lakh personnel of Delhi Police, who are paid salaries from the Police grant of the Ministry of Home Affairs. A separate section has been added on contracted manpower in the government.

Financial Resources of the State Governments: 7th Pay Commission Report

Financial Resources of the State Governments: 7th Pay Commission Report

Impact of Central Pay Commissions on State Finances

2.2.1 To address the question of implications of Seventh Central Pay Commission’s recommendations on the States, it was necessary to ascertain the fiscal impact of the previous Commissions’ awards on the states. To this end, Indian Institute of Management Calcutta (IIM, Kolkata) was asked to undertake a study on the subject for the Seventh CPC.

2.2.2 The broad conclusions of the study indicated that the states on the whole were able to manage their finances and absorb the fiscal shock caused by the VI CPC (relative to previous Pay Commissions) better, principally because of the implementation of the FRBM Act by the States.

2.2.3 The study finds that the macroeconomic impact on states depended on the speed and the extent to which individual states implemented their pay awards, which varied considerably. The empirical analysis conducted indicates that the macroeconomic impact on States’ finances tends to taper off in two years in most cases. In this context, it is encouraging to note that States’ finances continue to be reasonably sound at present.

2.2.4 It is clear from the study 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 and subsequent Government of India award.

2.2.5 The question then is the extent to which these findings continue to hold true at present. RBI (2015)4 reports that the consolidated revenue deficit of all states (budget estimates) is expected to be (-)0.4 percent for the year 2014-15. Further, the Fourteenth Finance Commission has increased the ratio of States’ share in the divisible pool of receipts to 42 percent from the 32 percent that obtained in the Thirteenth Finance Commission. States as a whole are expected to maintain this healthy trend, particularly since the macroeconomic outlook is now expected to be better than in the recent past. Ceterus paribus, one would expect this situation to remain, if not improve, in 2015-16. States’ own revenues, as a percentage of Gross State Domestic Product (GSDP), are also stable at 7.7 percent for three years now.

2.2.6 Notwithstanding this commendable fiscal performance, it is important to see how states were able to cope with the award of the VI CPC and the impact of the award on the macro fiscal fortunes of the individual states

2.2.7 In the case of Special Category States (SCS) it is generally recognised that these states would, because of their special circumstances, only secure fiscal consolidation if additional resources were made available to them over and above their share of revenues from the divisible pool. Central Governments do not, in normal cases, provide such assistance. Finance Commissions take account of this fact by providing such states with revenue deficit grants. Thus, both the 13th and 14th Finance Commission awarded revenue deficit grants to most of these special category states. In addition, these states also receive special purpose grants that take account their specific cost disabilities and low revenue base. These efforts have been
broadly successful. The RBI (2015) clarifies that the special category states as a whole have not been incurring revenue deficit in recent times.

2.2.8 In the case of the General Category States (GCS), in recent times, only a few states have consistently faced revenue deficits. We find (Table 1) that some states that were normally in revenue surplus did incur revenue deficits following the implementation of their Pay Commission awards. However, these states were able to stabilise and return to revenue surplus within a reasonable period of time. Therefore, there is every reason to expect states that are currently structurally fiscally prudent and in compliance with FRBM to be able to cope with the consequences of increases in pay allowance and pension (PAP), as long as the level of fiscal prudence is broadly in line with that of the Seventh CPC recommendations.

Table 1: Revenue Deficit of General Category States (GCS) (as % of GSDP)

Source: State Finances- A Study of Budgets, Reserve Bank of India. The numbers for 2014-15 and 2015-16 are from states budget documents.

Note: “*” Andhra Pradesh here refers to erstwhile Andhra Pradesh before Telangana was formed. Data for 2014-15 and 2015-16 is related to the new State of Andhra Pradesh.

2.2.9 In the case of States that have been in chronic revenue deficit there is no doubt that even the awards with the level of fiscal prudence of Seventh CPC will cause a fiscal strain to these states. These states must “cut their coat according to their cloth.” Therefore, just as in the case of all expenditures that states with chronic revenue deficits undertake, they will have to be more restrictive in their pay awards than states which have successfully secured fiscal consolidation.

2.2.10 The FFC has opined as follows, “….the recommendations of the Seventh Central Pay Commission are likely to be made only by August 2015, and unlike the previous Finance Commissions, we would not have the benefit of having any material to base our assessments and projections and to specifically take the impact into account. We have, therefore, adopted the principle of overall sustainability based on past trends, which should realistically capture the overall fiscal needs of the States…” Thus, account has been taken of the Commission’s recommendations at a macro-fiscal level by the FFC.

2.2.11 In this context, it should be borne in mind that the FFC has also provided revenue deficit grants to states to compensate for cost disabilities and shortfalls in their tax base. Such grants have been awarded to key states with chronic revenue deficits after a rigorous assessment of their revenue base and expenditure needs. Hence, these States have already secured additional resources from the divisible pool on this account and this should further enable them to administer pay awards consistent with fiscal prudence and allow them to persist in their path to fiscal consolidation.

2.2.12 It is also clear from the study by IIM, Kolkata that the pace and impact of implication of pay commission award varies quite substantially across the States. The States have deployed a number of options to deal with impact of their pay awards following the awards made by the Government of India based on the recommendations of the previous Central Pay Commissions.

The states used the following options:

deciding to award lower increases than the Centre,
deciding on a date of implementation different from that of the Centre,
staggering the payments of arrears suitably,
generating additional tax and non-tax revenues, and
compressing expenditures

2.2.13 On the basis of above analysis, we conclude that States which have successfully maintained fiscal consolidation will be able to absorb the impact of additional expenditure on PAP and the fiscal stress on them in so doing would not exceed that faced by the Government of India. This would require States to calibrate the speed and the extent of their own award. It is to be expected that the existing fiscal arrangements that govern the relation between the Centre and special category States would continue to hold. In the case of general category States undergoing long term fiscal stress, clearly further structural fiscal reforms are immediately and urgently required. In these circumstances calibration of pay awards in such
states would need to be more prudent than other States.

General Economic Situation and Financial Resources of the Central Government - Section-II

7th CPC Report: General Economic Situation and Financial Resources of the Central Government

Section-II

2.1.12 With the above framework in place we can now assess the extent to which the Seventh Central Pay Commission’s recommendations address macroeconomic conditions, the need for fiscal prudence and availability of adequate resources for development and welfare expenditures. Table 2 presents different categories of PAP expenditures as percentages of GDP over time. It is clear from the table that pay and allowances as a proportion of GDP has remained fairly stable since 2010-11, i.e., in the range of 1.8 percent and 2.0 percent, as has the share of pensions, which has ranged between 0.9 percent and 1 percent of GDP.

2.1.13 The Seventh CPC recommendations can cause macroeconomic stress in two ways:

1. The awards of the previous Pay Commissions, both V as well as the VI, involved payment of arrears. If awards are made with an arrears component then the cumulative impact of arrears would temporarily increase government expenditure on PAP, thereby causing an appreciable shock, albeit for a short time. This shock impacts both fiscal stability and the price level through demand and supply channels. However, the Seventh CPC recommendations entail, at best, payments of marginal arrears and we do not therefore envisage any macroeconomic shock on this score.

2. A pay commission award can cause a significant increase in the ratio of PAP to GDP in the year the award is implemented. This happens for two reasons:

a. Due to the fact that many allowances are not fully indexed to DA, and some allowances are not indexed at all, there is some increase in expenditure on PAP that happens when basic pay and DA are merged.

b. Total government spending on PAP increases due to an increase in the real value of PAP as a consequence of a pay commission award.

2.1.14 As we show in Table 2 the cumulative effect of these elements on the award of the VI CPC was of the order of 0.77 percent of GDP in 2009-10. This Commission is of the view that any macroeconomic impact that exceeded this number would not be fiscally prudent and would put undue pressure on the government in terms of discharging its development and welfare spending responsibilities. Table 2 shows the impact of the proposed recommendations of the Seventh CPC. In arriving at an assessment of the impact, three Scenarios have been considered. Scenario I represents a “business as usual” scenario i.e., a situation that we estimate would prevail in the absence of the pay commission award. Scenario II represents the net impact on the PAP-GDP ratio if the Commission were to only merge basic pay and DA. Scenario III
represents the full impact of the Seventh CPC’s recommended award on the PAP-GDP ratio.

2.1.15 The merger of basic pay with DA would need to be effected in the sense that this merger is inevitably carried out when Pay Commissions submit their recommendations. The net increase as a consequence of the pay commission recommendations is therefore the difference between the PAP-GDP ratio in Scenario III and Scenario II i.e., 0.56 percent. The Commission is of the view that this represents an extremely reasonable increase in the PAP-GDP ratio in the initial year of award. In future years this ratio will in fact decline, as GDP growth is expected to be faster than the growth rate of inflation in future years as projected by the government and as explained in Section-I above.

2.1.16 The total impact of the Commission’s recommended award is also less than that of the VI CPC. As can be seen from Table 2, the increase in PAP-GDP ratio (excluding arrears) in the case of the VI CPC was 0.77 percent of GDP as compared to 0.65 percent (the difference between the PAP-GDP ratio in the year following the award period) in the case of the Seventh CPC’s recommendations.

2.1.17 In assessing the impact on the capacity of the government to maintain its expenditure on welfare and development commitments, it would be incorrect to simply look at the ratio of PAP to total revenue expenditure. This is because the railways are expected to meet their PAP commitments from their own internal resource generation and therefore it is not appropriate to include the railways component of PAP in our calculation. We have therefore calculated the increase in the share of PAP in total revenue expenditure (excluding railways) in the two years following the VI CPC award and compared this with our estimated increase in this ratio in the year following our award, if the Seventh CPC recommendations are accepted.

Table 2: Impact of VI CPC and Seventh CPC Awards on Macro-fiscal Statement

(In percentage)

Impact-6thCPC-7thCPC-Awards-Macro-fiscal-Statement

2.1.18 We find (Table 2) that the rise in estimated share of PAP in total revenue expenditure (excluding Railways) as a consequence of the Seventh CPC recommended award will be 4.25 percent which is lower than the corresponding figure for the VI CPC award which is 4.32 percent (Table 2).

2.1.19 The Commission has not made any assumptions regarding efficiency savings, which will no doubt be effected as part of the overall government strategy for enhancing administrative efficiency, and following implementation of the report forthcoming from the Expenditure Management Commission. If these reforms are credible, one would expect efficiency gains to more than pay for these modest increase in the PAP-GDP and PAP (excluding railways)/RE ratios. Thus, we feel that the macroeconomic impact of the recommendations is in conformance with the need for fiscal prudence and macroeconomic stability.

Assumptions

Gross Domestic Product

2.1.20 The central statistical organization (CSO), Ministry of Statistics and Programme Implementation (MOSPI) has released the new series of GDP with base year 2011-12 with revisions in methodology of estimating national income3. However, at the time the calculations for this chapter were made, the CSO had not released the back series of GDP based on the new base year. The CSO, in its press release (see footnote below), stated, “…Improvements as noted above, especially incorporation of new datasets, have resulted in a correction in the level of GDP, which is likely to affect a wide range of indicators where it is used as a reference point:

for instance, trends in public expenditure, taxes and public sector debt that are conventionally analysed in terms of their ratios to nominal GDP. It may be noted that the level of revision in the present base revision is not large enough to affect any of these ratios significantly….” In the annexure attached to the press release it indicates changes in GDP at the aggregate level.

2.1.21 After consultation with the Chief Statistician of India, MOSPI, we created the back series of GDP with new base year assuming that the gap between the two series at the new base year will remain at least constant for previous years. In addition, we also calculated the impact of Seventh CPC award with the old GDP series for the year 2015-16 and 2016-17 by using the nominal growth rate of the new series for these two years. The impact of pay and allowances on GDP under both series is thereby analysed and the difference between the estimates of two series is minimal.

2.1.22 Further, in case of new series, while projecting the GDP for 2016-17, we assumed that the real growth rate of GDP will be 7.5 percent and inflation will be 4 percent in 2016-17.

Pay and Allowances
2.1.23 The actual data from Finance Accounts of India for pay and allowances and pensions is available till 2013-14. We, therefore, projected the data from 2014-15 onwards with an annual growth rate of 11.07 percent (an average of PAP from 2011-12 to 2013-14).

Pensions

2.1.24 The share of pensions in total PAP has been stable since 2009-10. Thus, we maintained the same share while estimating the projections for pensions for 2016-17 and estimated the total pensions under different scenarios as in the case of pay and allowances.

Expenditure

2.1.25 To assess the impact of Seventh CPC award on Central finances, we considered the total expenditure and revenue expenditure projections made by FFC. We also analysed the impact using the Budget estimates for 2015-16. The budget estimates for 2016-17 were projected, using the projections made by FFC for 2016-17 over 2015-16.