Deferred implementation 7th CPC award to Central government employees and pensioners.

It is possible to contemplate implementing the basic pay plus DA [dearness allowance] merger in the current year.

National Institute of Public Finance and Policy Director and Member of the Seventh Pay Commission Rathin Roy spoke to The Hindu on his proposal of deferred implementation of its award to Central government employees and pensioners. Edited Excerpts:

Should there be a further pause on fiscal consolidation?

Absolutely not. For three reasons: First the FRBM [Fiscal Responsibility and Budget Management] target has been relaxed far too many times in India’s recent history. . Second, the ostensible reason for reducing the FRBM target, mainly to increase public investment, does not hold. Over 70% of the fiscal deficit is devoted to borrowing for consumption in the form of the revenue deficit. If you want to raise investment, you should do so by borrowing less to consume Three, even if the government wants to implement the [Seventh] Pay Commission award and modestly increase public investment, there is a pathway to do so, which I can see and so presumably can the Ministry of Finance.

What is this pathway for implementing the Seventh Pay Commission award to Central government employees and pensioners?

The Pay Commission award would result in a net impact on the Government of India Budget of approximately 0.5 % of GDP because the nominal GDP is lower this year than I calculated in the Pay Commission report. It is possible to contemplate implementing the basic pay plus DA [dearness allowance] merger in the current year and deferring implementing any real increases in pay and pensions to the future. This could be done by compensating those who would have to bear the burden of the deference by giving them a more generous award distributed over several years. I think what they should get, from April 1, 2016, is what they would get if we merge the basic pay and the DA, which is more or less what they are already getting. That will mean some increase in allowances but other than House Rent Allowance [HRA] the burden of that [on the government budget] will not be very high. The second thing we can do is defer allowances, principally the HRA. The case for that is strong because we are in the midst of fairly flat growth in consumption expenditure and rents are not going up much. The third thing we could do is to contemplate raising the service tax. Of course, the revenue generated will have to be shared with the States but when the GST [Goods & Services tax] comes in, the service tax rate will any way be approximately be 18%. Today it is 14%. So, a 2 percentage point increase in service tax is also a feasible option.

Could you explain your Pay Commission award implementation pathway proposal with an example?

My salary is Rs. 80,000 per month (basic) and with DA it comes to approximately Rs. 1,70,000. With the implementation of the Pay Commission award, that would go up to Rs. 2,30,000 a month. I am saying that the increment of Rs. 60,000 a month need not all be given at one go. It can be staggered and made more generous. So this could be done for pay and for pension. Now I am not competent to say whether this is politically feasible or not. But certainly it is an option.

Now on increasing public investment…

If you want to increase public investment, one option is to borrow less to consume, to reduce the revenue deficit. A 0.2% point reduction in the revenue deficit, say by reducing subsidies, can transfer to a 0.2 % point increase in public investment. That improves the quality of the fiscal deficit. If you cannot reduce the revenue deficit, you can reshuffle the portfolio of public sector assets. You can sell public assets that currently exist on the government books to the value of 0.2% of GDP. Here, you are selling public assets to create fresh public assets.

You are advocating disinvestment, which the government has not shown much political appetite for especially strategic sales and privatisation…

I can think of several reasonably profitable public enterprises which perform no public functions. Have you ever heard of a company called Balmer Lawrie? It’s a government travel agency. I would urge that the government identify assets like this which have no perceptible impact on either public welfare or on the ability of the government to steer the economy in the direction it wants and sell them.

Other options?

Given both the debt and fiscal deficit numbers of the States and Centre taken as a whole are healthy then it just might well be worth considering allowing States to increase public investment rather than the Centre. We could think of relaxing the states FRBM targets which can then increase public investment because the States together are not borrowing to consume [unlike the Centre]. The States together are running either a zero or very small revenue deficits. Allowing them to increase their fiscal deficits for the purpose of public investment will be far more virtuous in terms of the quality of the fiscal deficit than allowing the Centre to do it with its high level of revenue deficit. The point is that the agency to do it consistently with the minimum loss of the quality of fiscal rectitude today happens to be the states, not all, but taken collectively.

Growth depends on the combination of fiscal and monetary policy. The Reserve Bank’s Governor doesn’t appear open to reviewing the inflation target…

Setting the inflation target is not a technical exercise anywhere in the world. What the inflation target should be is not a call of the Governor, though his opinion is very important, it is ultimately the call of the government of the day and therefore of the Prime Minister and the Minister of Finance. We have an inflation target of 4%-5% and it is delivering to us a repo rate which is translating to an average lending rate of 11-12% whereas the nominal GDP growth is 7.75%. Think of the economy as a business. You are asking me to borrow money at 12% and the return I get from that borrowing is 7.75%. It doesn’t make good business sense. So something has to give. Either we reduce the cost of capital or we raise the nominal growth rate. The real rate of growth is only 50 basis points lower than forecast by the government But the nominal rate of growth has collapsed from around 13% just ten months ago to around 7.5%.

Are you saying that the inflation target for the RBI needs to be revised upwards? Or does it need to be redefined?

If you brought the GDP deflator in line with exactly what the consumer price index [CPI] is then we would be home dry because if real growth is 7.5% and the CPI is 4.5% then the nominal growth rate will be 12%.

So you are saying review not the inflation target but the GDP deflator?

The deflator needs to be re-evaluated. If you are not willing to do that then your inflation target needs to be re-examined.

Is an inheritance-based wealth tax an option?

As Gandhiji said of western civilisation, it would be a very good idea.