The report of the 14th Finance commission of Government of India on Pay and Pension of Government employees in its paras 17.23 to 17.30 is reproduced below .
Its report has its impact upon the 7th Central Pay Commission to draw its report for submission to the Central Government
Pay and Productivity
Wages and salaries constitute a significant portion of the committed liabilities of both the Union and States. Periodic revisions based on the recommendations of the Pay Commissions of the Union, with States following suit, have contributed to rising revenue expenditure. For States in particular, the fiscal impact of a pay revision is severe, as the share of salary expenditure in their total revenue expenditure is substantially larger than in the case of the Union. Arrears in pay and bi-annual releases of Dearness Allowance compound the burden.
Technically, the recommendations of a Central Pay Commission are only for Central Government employees and States are not bound to follow suit. Indeed, up to the 1980s, States constituted their own Pay Commissions and prescribed their own pay scales, based upon their fiscal capacity. However, since the Fifth Central Pay Commission, salaries and allowances in States have tended to converge with those in the Union Government and since the Sixth Central Pay Commission, almost all States have adopted the Union pattern of pay scales, albeit with modifications.
An internal study by the Commission brought out the fact that the Union Government's expenditure on pay and allowances2 (including expenditure for the Union Territories) more than doubled for the period 2007-08 to 2012-13, from Rs. 46,230 crore to Rs. 1,08,071 crore.3 This increase can be largely attributed to the implementation of the Sixth Central Pay Commission recommendations, evident from the per employee annual salary (excluding defence salary) increasing from Rs. 1,45,722 to Rs. 3,25,820 over this period. Moreover, the share of expenditure on pay and allowances in revenue expenditure (net of interest payment, pensions and grants-inaid) increased from 11.8 per cent in 2007-08 to 13.1 per cent in 2012-13. The incidence of salary expenditure is much higher in the States than in the Union. In 2012-13, the share of expenditure on pays and allowances of all employees in the revenue expenditure (net of interest payments 2 Excluding productivity linked bonus/ad-hoc bonus, honorarium and encashment of earned leave, and travel allowances. 3 If salary of defence services is included, the corresponding figures will be Rs. 73,073 crore and Rs. 1, 84,711 crore. 239 Chapter 17 : Public Expenditure Management SERVER 3\E\3374FINANCE (CHAPTER 17) and pensions) among the States ranged from 28.9 per cent to 79.1 per cent. Per employee (for regular employees) salary in 2012-13 across States ranged between Rs. 2,12,854 and Rs. 5,49,345. Thus, the impact of revisions in pay scales on fiscal positions is uniformly significant, though it varies widely across States.
Given the variations across States and the lack of knowledge about the probable design and quantum of award of the Seventh Central Pay Commission, we believe that it is neither feasible, nor practicable, to arrive at any reasonable forecast of the impact of the pay revision on the Union Government or the States. Further, any attempt to fix a number in this regard, within the ambit of our recommendations, carries the unavoidable risk of raising undue expectations.
Our concern is the likely impact on overall budgetary resources, particularly of the States, once the recommendations of the Seventh Central Pay Commission are announced and adopted by the Union Government. All States have asked us to provide a cushion for the pay revision likely during our award period. The Union Government's memorandum has built, in its forecast, the implications of a pay increase from 2016-17 onwards. 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.
In our view, on matters that impact the finances of both the Union and States, policies ought to evolve through consultations between the States and the Union. This is especially relevant in the determination of pay and allowances, where a part of the government itself, in the form of the employees, is a stakeholder and influential in policy making. A national view, arrived at through this process, will open avenues for the Union and States to make collective efforts to raise the extra resources required by their commitment to a pay revision. More importantly, it would enable the Union and States to ensure that there is a viable and justifiable relationship between the demands on fiscal resources on account of salaries and contributions to output by employees commensurate with expenditure incurred. In this regard, we reiterate the views of the FC-XI for a consultative mechanism between the Union and States, through a forum such as the Inter-State Council, to evolve a national policy for salaries and emoluments.
Further,we would like to draw attention to the importance of increasing the productivity of government employees as a part of improving outputs, outcomes and overall quality of services relatable to public expenditures. The Seventh Central Pay Commission, has, inter alia, been tasked with making recommendations on this aspect. Earlier Pay Commissions had also made several recommendations to enhance productivity and improve public administration. Productivity per employee can be raised through the application of technology in public service delivery and in public assets created. Raising the skills of employees through training and capacity building also has a positive impact on productivity. The use of appropriate technology and associated skill development require incentives for employees to raise their individual productivities. A Pay Commission's first task, therefore, would be to identify the right mix of technology and skills for different categories of employees. The next step would be to design suitable financial incentives linked to measurable performance. We recommend the linking of pay with productivity, with 240 Fourteenth Finance Commission SERVER 3\E\3374FINANCE (CHAPTER 17) a simultaneous focus on technology, skills and incentives. Further, we recommend that Pay Commissions be designated as 'Pay and Productivity Commissions',with a clear mandate to recommend measures to improve 'productivity of an employee', in conjunction with pay revisions. We urge that, in future, additional remuneration be linked to increase in productivity.
Pensions have been growing steadily, and the liability for pension payments is likely to cast a very heavy burden on budgets in the coming years. Some of the factors contributing to this growth are: (i) the rise in pensions recommended by successive Pay Commissions; (ii) removal of the distinction between people retiring at different points of time, so that all pensioners are treated alike in their pension rights; (iii) taking over the liability for pensions of retired employees of aided institutions and local bodies; and (iv) increasing longevity. The New Pension Scheme (NPS), a contribution-based scheme introduced by the Union Government in 2004 for all new recruits after the cut-off date, has now been adopted by all States, with the exception of West Bengal and Tripura. This scheme has the merit of transferring future liabilities to the New Pension Fund and factoring the current liability on a State's contribution from its current revenues. We urge States which have not adopted the New Pension Scheme so far to immediately consider doing so for their new recruits in order to reduce their future burden.