For whom is India shining?

Comparisons show India's Wage Bill for central government employees is among the highest.

This is one debate on which jury is still out, and is likely to remain so till kingdom come. It is about public versus private sector salaries.

It’s the private sector guys who take cash home in busloads, allege bureaucrats and public sector-wallahs!

Not a chance, say their private sector counterparts: we don’t get free housing in the best parts of the town, unlimited medical reimbursement, jobs for life and, best of all, pension, often for many more years than spent in service!
    
The debate has now been joined by the International Monetary Fund (IMF).

A recent technical note argues that accurate comparisons must take into account all aspects of compensation, including in-kind and non-monetary benefits and deferred compensation — e.g., pension or disability and survivor benefits — and greater job security.
    
If these non-monetary benefits are extensive, say the authors, the government does not necessarily need to offer salaries that are on a par with the private sector to retain high-quality employees.

Studies suggest that differentials are negligible in Indonesia, France and the UK, but are large and favour public sector employees in India.
    
They suggest that a range of indicators, rather than a single benchmark, should be used for analysing compensation and employment in government.
    
Comparing government compensation as a share of GDP and as a share of total government spending with other countries at a similar level of development is a good way to start.

The paper concludes that there are definite patterns. Thus, as a share of GDP, general government compensation of employees is highest in Europe (10% of GDP) and lowest in Asia and the Pacific (6.5%).
    
Government compensation of employees as a share of domestic revenues gives a fair indication of the sustainability of wage outlays, but in computing such compensation, the paper argues that non-monetary benefits such as travel, housing and other allowances should be included to make a fair comparison.

At about 16% of total expenditure and 30% of total revenue, without monetisation of other benefits, India’s wage bill for central government employees is among the highest, according to Budget estimates for 2010-11 (see accompanying table).
    
High-quality reforms of public sector employment and wages are difficult to implement in a short period of time.

However, in periods of severe fiscal pressure, governments may still need to resort to short-term measures to contain employee compensation that could be replaced over time with more sustainable reforms.
    
What are the short-term options? These include a temporary freeze on wages. This should result in a reduction in the compensation of employees, relative to GDP, as the economy expands in nominal terms.
    
Natural attrition, when combined with a hiring freeze in select non-priority areas, can help reduce the compensation of employees.

Temporary layoffs are another option, as is accelerated early retirement. The authors caution that this option should be assessed carefully, as overly generous retirement packages can result in high fiscal burden in future.

In the short term, the savings from these options may be very modest if there is a need for upfront payment of severance benefits.
    
Over the medium term, rationalising the size and structure of the government is vital. Linking pay increases to performance provides incentive to workers for improving efficiency and productivity.
    
High wage bills have often been linked to weak payroll controls.

Public financial management (PFM) reforms that strengthen such systems would enable more effective expenditure control, including through the elimination of fictitious workers (recall the case of thousands of non-existent sweepers who were discovered to exist only on the muster rolls of the MCD!).
    
An alternative to direct provision of public services by the government is to outsource these to the private sector. Non-core functions such as transport, mail, cleaning, catering and maintenance could be outsourced with considerable success.

The UK, for instance, saved between 20% and 30% as a result. So could India, but that calls for political courage and leadership, both of which seem to be in short supply at present!