Increasing GDP growth by increasing cost of government

The truth is now staring us in the face. The latest breakdown of sectoral contribution to growth is out. Get ready for this. Public Administration, which somewhat perversely is classified as part of services, has now grown by 7% over the previous quarter, making it the biggest driver of growth in India. Very simply this means as you keep paying government employees more, the GDP will keep growing ever faster till one day you run out of breath and cash. In the Q3 of 2018, Public Administration added contributed 17.3% towards growth. In Q4 of 2018 it has grown to 22.4% making is a fraction smaller than the contribution of manufacturing at 22.7%.

But hold your breath. Not satisfied with the 7th Pay Commission’s across the board hike of 23%, government employees are hopeful that Prime Minister Narendra Modi on August 15 will make an announcement fulfilling the promise made by the Finance Minister to give central government employees a pay hike beyond the recommendations of the pay commission. They are also hopeful that the retirement age will be raised to 62 years, allowing them to serve this poor and hapless country longer.

There had been a spate of commentaries about how beneficial the 7th Pay Commission-mandated pay hikes, now approved by the Union Government with retrospective effect. will benefit the economy. Despite this munificence, some government employees have called the 23.5% across the board hike peanuts! Others have made comments like “you pay peanuts you get monkeys!” as if you will now have earnest and honest public servants because the same fellows will get more pay? The metaphor is unfortunate as well as illogical as the “monkeys” are already in place, only now the diet has become much richer. Fat monkeys are what you will get.

The high cost of wages has also slowed down intake into government and most departments are hugely understaffed. For instance, the Revenue collecting departments are under full staff strength by as much as 45.45%, Health 27.59% and Railways 15.15%. That the Ministry of Home Affairs is under strength by only 7.2% speaks volumes about how much has gone wrong in our system. We have a saying that the main business of government is to collect taxes so that they may be spent for the benefit of all the people. Thus we see the main business of government is now its least concern.

The sheer absurdity of the logic that higher government salaries are beneficial to the economy speaks volumes of the kind of stupidity that permeates our policy thinking at high places. By this logic if the pay hike was higher, GDP growth would be even higher. But think of this in terms of money denied for critically needed infrastructure and social development such as rods, power plants, schools and hospitals. As if these don’t generate GDP growth? Higher salaries mostly benefit those who get them. Period.

The last pay hike hike benefitted 23 million government employees in the central and state governments and their Public Sector Units. No doubt this will make the CII and FICCI members dance all the way to the bank. No wonder the top industry and banking analysts have given a big thumbs up to the Union Cabinet decision, stating the move will “boost consumption in the economy” and lead to higher GDP growth. It’s their fond hope that the pay hike combined with continued public push to the capital expenditure will help steer the economy to higher growth levels of 8% and above.

“The pay hike of nearly ₹1 lakh crore for government employees will give a strong boost to consumer demand and help uplift the growth of the economy,” said Didar Singh, then secretary general, FICCI. He will approve, being a former IAS officer rehired by the industry trade union. But has FICCI noticed the IIM-Ahmedabad study that has found the “pay in the government sector is distinctly greater than that in the private sector?” The 23.5% average hike in central government employees’ salaries pushed up the government’s wage bill, including arrears, by an estimated ₹1.14 lakh crores.

While you worry about the high cost of government, I will give you another reason to worry. If you wonder why our public administration is so ineffective, consider this. An analysis by a leading media organisation suggests that roughly 14% officers get transferred within one year of service and another 54% within 18 months. In other words, 68%, or over two-thirds of India's top bureaucrats, last on an average less than 18 months at a posting. Only 8% of the officers analysed had average tenures of more than two years and there are only 14 officers who have managed to complete an average stay of more than three years between transfers. So what is the government you are getting for all the money we spend?

This when 648 million Indians are living below the UNDP stipulated poverty line. The question we all must ask is growth at whose cost? Arun Jaitley crowing about it is akin to the head of a family who prefers to increase his spending on smoking and drinking by cutting down on the milk for the growing children.

The three levels of government together employ about 185 lakh persons. The central government employs 34 lakh, all the state governments together employ another 72.18 lakhs, quasi-government agencies account for a further 58.14 lakhs, and at the local government level, a tier with the most interface with the common citizens, we have only 20.53 lakhs employees. In other words it simply means we have five persons telling us to do this or do that, for every one supposedly serving us. And whom even these one out of six persons are answerable to is still a big question?

Do we then have a big government bearing down on us? Not really.

Consider this: India has 1,622.8 government servants for every 1,00,000 citizens. In stark contrast, the U.S. has 7,681. The central government, with 3.1 million employees, thus has 257 serving every 1,00,000 population, against the U.S. federal government's 840. Now look at the next tier at the state level. Bihar has just 457.60 per 1,00,000, Madhya Pradesh 826.47, Uttar Pradesh has 801.67, Orissa 1,191.97 and Chhattisgarh 1,174.62.

This is not to suggest there is a causal link between poverty and low levels of public servants: Gujarat has just 826.47 per 1,00,000 and Punjab 1,263.34. The troubled states or really-speaking the troublesome states actually fare far better on this score. Thus, Mizoram has 3,950.27 public servants per 1,00,000 population, Nagaland 3,920.62 and Jammu and Kashmir 3,585.96. Bar Sikkim, with 6,394.89 public servants per 1,00,000, no state comes close to international levels.

Very clearly for the most part, India's relatively backward states have low numbers of public servants. This means staff is not available for the provision of education, health and social services needed to address poverty. It would seem that instead of getting better government and more public servants, we are getting more expensive government.

We are now riding the tiger of a high wage enclave of government employees, who also drive consumption and hence GDP growth. It may now be difficult to get off this tiger.