READ BELOW CAREFULLY IF YOU HAVE TIME AND WANT:- UNQUOTE by R Jagannathan Sep 26, 2013 11:45 IST #7th Pay Commission #ConnectTheDots #GDP #government employees #Inflation #Lose-Lose #Manmohan Singh #NDA #P. Chidambaram #Pay commission #Seventh Pay Commission #UPA 108 Comments There is now little doubt that the UPA government is not only in election mode, but is going down the dangerous trajectory of leaving a scorched earth for its successor. A politically bankrupt government is ensuring that it leaves a bankrupt treasury and a whole host of ticking timebombs for the next government, making one wonder if the UPA has the country’s interests in mind. No government which believes it has a chance of coming back to power will ever do what the UPA has done over the last few months. It would be extremely charitable to view the ruinous food security bill, the ill-conceived land acquisition bill and several other such schemes as mere poll-eve giveaways that all political parties indulge in. But the announcement of the Seventh Pay Commission on the eve of assembly elections to five states leaves no room for any doubt that the UPA plans to leave a poisoned economy when it leaves office in 2014. The obvious political calculus is that the next government will be up to its neck in economic rubble for at least two years, after which, assuming there is a coalition of regional parties in power, there will be a compounding of the mess. The Congress hopes to ride the chaos and come back to power in 2016-17. The signal is that UPA expects the lose the next election, but wants to queer the pitch for the succor. PTINo government which believes it has a chance of coming back to power will ever do what the UPA has done over the last few months. PTI Contrast this with what the Atal Behari Vajpayee government did not do. It could have set up the Sixth Finance Commission in 2003-04, a year before the polls. But it did not do so for the simple reason that government finances were stretched, and pay was anyway being raised through higher dearness allowance. Consider also the dates of various pay commissions. The first one came in 1946, the second one in 1957, the third in 1970, the fourth in 1983 and the fifth in 1994. The sixth one came in 2006. It was implemented in 2008. Between two commissions the minimum gap has been 11-13 years. The seventh one is the only one to come after just seven years. The Seventh Finance Commission breaks with this tradition by being appointed barely seven years after the earlier commission, and barely five years after implementation of the earlier one’s decisions. The economy has simply not had enough time to adjust to the excesses of the last pay hikes. The decision is thus wrong for several reasons. First, there is the issue of propriety. Setting up a commission just before the elections, and that too before its time, clearly indicates a mala fide political motive. Some five million government servants, and three million pensioners will benefit. It’s about a vote bank, even if the resulting deficit busts the governments own fiscal bank. Second, it is completely irresponsible. The government’s finances are in the worst possible shape right now. The fiscal deficit is worse than it was it was in 2003-04, the last year of the NDA. The NDA took the right decision to postpone the pay commission; the UPA has the done the opposite when the situation is worse (expected fiscal deficit of 4.8 percent) and growth is slowing (sub-5 percent). Third, it is the wrong thing at the wrong time. The high fiscal impact of the Sixth Finance Commission – an annual recurring expense of over Rs 22,000 crore at the centre excluding states – was one of the factors that triggered high inflation and the subsequent growth slowdown. But in 2008 Lehman was yet to happen and the economy was on a cyclical upswing; this time, it is the exact reverse. The economy is on a downswing, and the fiscal situation is parlous. The pay commission will ensure that inflation gets worse, the exchequer gets into a mess, and the growth slowdown will accelerate. It should be obvious to anyone that sensible economics means giving a gap of more than 10 years between the setting up of one commission and the next. It takes at least five to seven years for the fisc to adjust to the cost increases. If the last commission raised the salary costs by Rs 22,000 crore a year, after the double-digit inflationary regime of UPA-2, once can safely assume that the Seventh Pay Commission-imposed costs will not be less than Rs 50,000 crore in additional annual salary costs only for the centre. This is a recipe for crippling the centre. It is not the work of a government trying to lure voters, but that of a petulant dispensation trying to ruin the playing field for the next government. This is one of a piece with the earlier two initiatives of the UPA – the food and land bills. The food bill, ostensibly intended to tackle hunger and malnutrition, will do nothing of the kind for malnutrition is not going to go away by giving rice and wheat cheaper to the poor. They need protein-based foods and better sanitation and healthcare. The food bill does not address that at all. Instead, by cutting entitlements (from 35 kg to 25 kg per family of five) and extending the subsidy to two-thirds of the population (more than double the current recipients), the bill will give benefits to the non-poor, even while making the budget deficits worse. The land bill too is intended to make things worse for the economy. If one were to ask what is the remedy for delayed projects and lack of investment in public infrastructure – the result of policy paralysis in UPA-2 - the answer would not be to legislate further delays. The land bill seeks to ensure that no project ever takes off for another five years. That this is being done in the name of fair compensation to poor farmers.It will certainly benefit some farmers, but the chances are the richer farmers and landowners will make a bigger killing by taking over agricultural land in advance. The bill will ensure that the process of land acquisition will lengthen from three to four or five years, and raise the cost of industrialisation and urbanisation (two things guaranteed to reduce poverty). Worse, there is another poison pill embedded in it. It is clearly tilted against states. Once the bill becomes law, it is not central projects, but state projects that will be handicapped. Ram Singh, an associate professor in the Delhi School of Economics, writes in The Economic Times: “The Bill throws up serious challenges for the states. Contrary to perception, the largest proportion of affected projects will be that of the states. The lawmakers have failed to notice that the bill discriminates between projects of the Centre and those of the states. All of its provisions apply to projects of the state governments, including social impact assessment (SIA), increased compensation to the landowner and the rehabilitation and resettlement (R&R) of the project-affected people.” What could be more diabolical for a central government, now on its last legs, wreaking vengeance on the states? There is little doubt that the UPA, in its final months in power, is doing enormous damage that the next government will find difficult to undo quickly. These are not acts of a political party seeking to come back to power in 2014, but that of a bloody-minded entity keen to ensure that the successor is ruined. If the successor regime is not strong, it will be up the creek without a paddle.
Posted on: Thu, 11 Sep 2014 07:09:19 +0000
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