The 7th pay commission instituted by the Government recently seems to be an arbitrary move with impugning impact on the economy, especially considering the current scenario. With 80 lakhs beneficiaries that include central Government employees, defense personnel and others, the additional cost to exchequer comes out to be Rs 1 lakh Crores.
As it is, most of these beneficiaries already enjoy index-linked wages to make up for the price rise due to inflation, which is primarily due to financial mismanagement of the Government. Effectively, the very agency that mismanages the economy conveniently links its wages with it to shield itself from the ensuing ill effects. The equation of accountability is clearly not balanced.
According to Chanakya, 'prosperity or wealth depends on good governance of the state'. Chanakya also adds that 'Economic Prosperity of the state creates prosperity for the people'. Evidently, certitude of good governance is linked to prosperity of people, which is derived from economic prosperity of the state. Prosperity, thus, is virtue that is enjoyed not by an individual; it is a collective status developed by a state passed on to individuals. The 7th pay commission, however, is a selective prosperity doled out by the state to a few individuals by compromising economic prosperity of the country. The new commission is nothing but connivance between two parties who happen to be the same. Thus it is unlikely that anyone will complaint.
There are economic consequences to it however. The extra Rs 1 lakh crores needed for the program is not going to come from incremental economic value created in the system. In fact, it is going to come from nowhere. It means that with this step, Government has already allocated a significant portion of future taxpayers' money for itself even before its services are delivered. The big hole created due to the new commission will accelerate the fiscal deficit by 15-20%, pushing an already precarious economic condition to the brim of collapse. Inflation is the other collateral damage the economy will be left to suffer with. The end-loser is, of course, the innocent taxpayer who will have to bear the cost of extravaganza.
For a financial incentive to deliver the desired results, as any financial manager may advice, it must come with a claw-back. It means, the Government shall not pay incentives to its employees if the machinery is not able to achieve its target reasonably. However, such policies are primarily found in private companies not in the corridors of power. Notably, not all private companies are in a position to offer inflation index-linked wages during hard times. But they can offer other options.
The general ordinance of tax application has been laid out in black and white. Besides nominal tax deductions, such as section 80C, ordinary taxpayers are expected to pay their taxes in time. Its high time a new 'performance' section is introduced in the tax books that adjust the tax rate or standard deductions as per the performance of the economy. For instance, if inflation is one of such performance index, a 1% increase in standard inflation from last year should be compensated with an adequate downward adjustment in tax rate for the year - say from 20% to 18%. The reduction in tax rate will reduce direct tax collection by the Government who may be discouraged to dole out bountiful to its employees during hard times. At the same time, common taxpayers would be compensated for the extra load they had to face because of high inflation.
Economists may crowd out the suggestion by stating it as pro-inflation move. It is true that a policy to put more money in the hands of people is sensible during economically hard times. More money in the hands of people during high inflation would spur more inflation. However, the argument loops back to 7th pay commission that intends to benefit about 20% of the current tax paying population of the country. It too would lead to inflation.
The funny part of the 7th pay commission is that it is moving in a direction opposite to the central bank's intended economic policies. By securing future inflation, the 'low-rate high-growth' regime is pretty much ruled out for medium term. India will continue to struggle with 'high-rate low-growth' regime for some more time and it is the new reality that we must come to terms with.
(The writer is Director, InvestCare, leading wealth advisors. You can reach him at samar.vijay@investcare.in)