Role of Pay Commission in Wage Fixation

Economy of India

Post Independence
The post independence period of economy of India was a litmus test for the economic
planners. Having come out of the shadow of colonial rule, the nation had a huge challenge of
undoing the exploitation of colonial era. The founding fathers had to use economic upliftment
as a tool for nation building. The economy then was backward in nature.
Industry was characterized by ill equipped technology and unscientific management.
Agriculture was still feudal in nature and characterized by low productivity. Transport and
communication systems were not properly developed, educational and health facilities
insufficient and the complete absence of social security measures.
Poverty was visible and unemployment widespread, resulting in a low standard of
living. To guide the Indian economy towards a path of growth and development, the
economic planners decided to adopt a course of mixed economy, assigning a vital role to
public sector enterprises and economic planning. Private enterprise participation was
negligible. A system of License Raj developed, by which entrepreneurs had to seek
permission from government to set up manufacturing units. The government effectively
controlled everything. During this period the banks were nationalized between late 1960's and
early 1970's.
India resorted to economic planning by the way of five year plans for economic
development.

Crisis In The Economy

The beginning of 1990’s, the Indian Economy was under great crisis and faced its stiffest
challenge. India faced a serious balance of payment problem and foreign exchange reserves
were at record low. That is when the government decided to alter the course of the Indian
economy.

Post Reforms

The introduction of reforms in 1991 resulted in sweeping changes in the Indian Economy.
The reforms process consisted of three processes, liberalization, privatization and
globalization (LPG model). Under liberalization markets were deregulated, under
privatization private participation was encouraged and many a public sector undertaking
(PSU) were privatized and under globalization restrictions on foreign investments were
removed. The Indian economy moved away from its isolation, to be integrated with the
global economy and to competitively utilize its advantages to make rapid strides in terms of
growth.
 In India today 60% of the population is dependent directly and indirectly on
agriculture and agriculture contributes 17% of GDP.
The Industrial sector has witnessed massive restructuring by the way of mergers and
acquisitions, process reengineering, foreign joint ventures, technological up gradation.
Certain sectors like cement, steel, aluminium, pharmaceuticals, and automobiles have been
witnessing unprecedented growth.
The service sector has been one of the major beneficiaries of the economic boom. The
outsourcing industry comprising of IT and ITE’S became the new poster boy of the Indian
economy. The huge pool of engineering talent was absorbed by the IT industry, while
graduates could carve out a career in the ITE'S industry. The purchasing power of the
booming middle class was enhanced, who went on a consumption spree, which in turn
allowed the retail sector to flourish. The booming economy also created a wave of real estate
boom across the country.
The supply of money into the economy has increased steadily due to FDI’s. (Between
April 2008 and January 2009, India received total foreign investments of US $ 15,545
million).The Foreign Institutional Investors (FII’s) have invested heavily in the stock market,
resulting in a continual bull run for an extended period of time. The BSE indices scaled a new
peak of 21,000 in January 2008.

Summary

The Indian economy is one of the fastest growing economies in the world. It can also be said
that the Indian economy has coped well to the pressures of the global recession, far better
than most other nations. The future looks positive for India and one can expect the nation to
progress strongly in the path of development.
 Pay Commission

The Pay Commission is an administrative system / mechanism that the government of India
set up in 1956 to determine the salaries of government employees. 

Pay Commission comprises of a panel of members of the Union Cabinet of India who
decide on and are responsible for increasing the salaries of government employees.

History of Pay Commission

After the Indian independence in 1947 there have been six pay commissions which have
been set up in order to look into and recommend changes in the pay structure of all
government employees. 

First Central Pay Commission (1946-47)

The first pay commission was set up in May 1946 and it took a year to submit its report. The
chairman of the first pay commission was Srinivasa Varadachariar.

The First Central Pay Commission innovated the principle of "living wage" to
Government employees. It observed that "the test formulated by the Islington Commission is
only to be liberally interpreted to suit the conditions of the present day and to be qualified by
the condition that in no case should be a man’s pay be less than a living wage." Amplifying
the concept of "living wage", it stated that the Government which sponsored the minimum
wage legislation for private industry must be willing to give the benefit of that principle to its
own employees. In other words, that Commission was of opinion that the salary of the lowest
paid employee should not be less than the minimum wage. While considering the question of
maximum salary, the Commission agreed with the view that the State should compete with
private enterprise in respect of prize posts; but expressed their inability to agree that the
salaries of public servants could be reduced below the standard remuneration available to
similarly situated employees in the private sector. The Commission recommended the
principle that, as a matter of social policy, the lowest paid should not fall below the "living
wage" (meaning thereby the minimum wage) and the top salaries should also as a matter of
social policy be kept down to the extent possible without jeopardising the essential
requirements of recruitment and efficiency. 

Second Central Pay Commission (1957-59)
The second pay commission was constituted 10 years after independence in August 1957. It
took two years to submit its report. The chairman of the second pay commission was
Jaganath Das. The financial impact of the second pay commission was Rs 396 million. 

The Second Central Pay Commission reiterated the principle that the pay structure
and the conditions of service of Government employees should be so designed as to ensure
recruitment of persons with requisite qualifications and ability at all levels and to maintain
their efficiency. It went on to state that, after determining the minimum and the maximum
salaries on a combination of both economic and social considerations, the intermediate
salaries should be fixed on sound and equitable relativities.

Third Central Pay Commission (1972-73)
The Third Pay Commission was constituted in April 1970 under the chairmanship of
Raghubir Dayal. The pay commission gave its report in approximately three years in March
1973. The financial impact of the recommendations of the third pay commission created
proposals cost the government Rs 1.44 billion. 

Third Central Pay Commission proceeded on the premise, inter alia, that the pay
structure, if it is to be sound, should satisfy the tests of "inclusiveness", "comprehensibility"
and "adequacy" and should, at the same time, be fairly simple and rational. Beyond the
minimum subsistence level, the adequacy or otherwise of the salary structure should be
judged by the level of salaries obtaining in alternative occupations. In the intermediate
ranges, the Commission emphasised that a limit should be set by what the economy can
afford and the upper range limit should be on considerations of social acceptability. While
observing that the Government should formulate a set of principles of wage fixation as suited
to its needs, it also remarked that the true test to be adopted should be whether the
Government service is attracting and retaining the persons it needs and whether such persons
are reasonably satisfied with the pay and other benefits taken together.

Fourth Central Pay Commission (1983-86)
The fourth pay commission was set up in June 1983 and it presented a detailed report in three
stages in a span of four years. The chairman of the fourth pay commission was P N Singhal.
The proposals of the fourth pay commission cost the government Rs.12.82 billion.

The Fourth Central Pay Commission was, however, guided by a number of factors for
determining the pay structure, viz., social status regard to which the public employment
carries in society, the authority of the post, security of tenure and the welfare measures
adopted by the Government for the benefit of its employees. Motivation for employees,
efficient performance and comparability were also considered by the Commission. The
Commission gave greater importance to the capacity of the State to pay its employee. The
Commission observed that the pay structure must be fair from the point of view of employees
as well as the people they serve.

Fifth Central Pay Commission (1994-97)

Fifth Pay Commission was constituted in 1994. The chairman of the fifth pay commission
was Justice S. Ratnavel Pandian and its recommendations cost the government Rs.17, 000
crore.

The Fifth Central Pay Commission was specifically asked to evolve the principles
which should govern the structure of emoluments and other conditions of service. So, the
Commission had to survey the principles adopted by the antecedent Commissions and
accepted some of the general principles including the three characteristics of a sound pay
structure, namely, inclusiveness, comprehensibility and adequacy. The well-accepted
principle of supply and demand consideration as emphasised by Islington Commission was
also reiterated. However, it emphasised on professionalism in Government service and the
Government should have less such people with better payment. It observed that there should
be transparency in pay packages and the need for merging of various allowances into a
simple allowance. The Commission also laid emphasis on the principle "equal pay for equal
work", "fair compensation", "productivity" and "model employer". Besides, the Commission
has considered certain other criteria like the intrinsic value of a job, delinking pay from
position in the hierarchy, interest of isolated posts, justice to lowest and highest paid
functionaries, liberal reimbursement of actual expenses and full compensation for entering
into the public service. The Commission, however, has emphasized the capacity of
Government to pay and kept it as the uppermost factor.

From the afore said, what could be deduced is that for the purpose of determining
salary structure, some of the following factors viz., the market forces of demand and supply,
cost of living, ability to pay, the prevailing pay structure in the society, equal pay for equal
work, the role and image of organisation and the expected performance of the employees are
taken into consideration.

These principles set out by the successive Pay Commissions are commonly used for
determining the appropriate pay scales of Industrial workers and Government employees.

Sixth Pay Commission

Members of the Sixth Pay Commission

Chairman : Mr. Justice B.N.Srikrishna 
Members : Prof.  Ravindra Dholakia,  Mr.  J.S.Mathur 
Member-Secretary : Smt. Sushama Nath

The sixth pay commission was set up in July 2006 under the chairmanship of Justice
B.N.Srikrishna. The recommendation of the commission cost the government about Rs.
20,000 crore.
The government employees had threatened to go on a strike if their salaries were not
raised. The government employees want a hike in their salaries mainly because the Indian
economy is facing a serious problem called inflation. The class 1 officers of the Indian
government are not adequately paid and the salaries of IAS officers are also very stumpy. The
Class 1 IAS officer in India are grossly underpaid with 25 years of work experience earning
just Rs.55,000 as his take home pay.
The pay commission suggested that arrears be paid to all government employees from
January 2006 to September 2008. 40% of these arrears were paid by the government in 2008
and the remaining 60% were paid in 2009. The primary goal of the Sixth Pay Commission
was to iron out complications in respect to various pay scales. In fact it recommended the
removal of pay scales and introduction of pay bands.

The Sixth Pay Commission mainly focused on removing ambiguity in respect of

various pay scales and mainly focused on reducing number of pay scales and bring the idea of
pay bands. It recommended for removal of Grouped-D cadre.
Sixth Central Pay Commission to Revise Salaries
The central government Thursday approved the setting up of the sixth pay commission
to upwardly revise salaries and perks for its 550,000 employees across the country.

A cabinet meeting headed by Prime Minister Manmohan Singh decided that the term of the
commission would be for 18 months.

The commission will comprise one chairman of the rank of minister of state, one part
time member and one member-secretary of the rank of secretary or additional secretary in the
central government, Information and Broadcasting Minister Priyaranjan Dasmunsi said after
the cabinet meeting.

The prime minister will appoint the chairman and other members of the commission,
He said-The proposal is estimated to cost the government an additional Rs.200 billion ($ 4.2
billion).

According to the official press note released after the cabinet meeting, the panel
would also examine desirability, the need, and quantum to sanction interim relief, if any. This
will enable consideration of certain aspects of service conditions of central government
employees.

The implementation of the panel's proposals is expected to take two to three years,
and an interim relief of 10-15 percent may be announced for that period.

The sixth pay panel had been announced by Manmohan Singh in February 2007. Pay
panels are periodically constituted to examine various issues such as pay and allowances,
retirement benefits, conditions of service and promotion policies of central government
employees. There is no stipulation regarding any specific time period for constitution of a pay
commission.

Uttar Pradesh to Implement Sixth Pay Commission 

Lucknow: Uttar Pradesh Chief Minister Mayawati Monday declared in the state assembly
that her government would promptly implement the recommendations of the Sixth Pay
Commission.

The commission, appointed by the union government, had recently submitted its
report to the central government which was approved by the union cabinet.

Mayawati's decision was understood to have been prompted by the most obvious
political consideration of the forthcoming Lok Sabha elections. Therefore, not withstanding
her badly soured relations with the UPA government, she had decided to go ahead with the
pay commission recommendations.

"Mayawati, decided to implement these recommendations in the larger interest of the

well being of the government employees who are facing an acute crunch on account of the
rising prices of essential commodities for which the central government was squarely
responsible", she told a press conference shortly after making the announcement on the floor
of the state assembly.

"The new pay commission would be brought into force with effect from December-
01. Though it would implement it with retrospect from Jan 2006.

She further added: "Even though the central government had been indifferent to our
repeated request for additional resources and had also flatly refused to concede our demand
for a special package of Rs 80000 crore, still we decided to mobilize our own resources to
meet the additional burden that the new pay scales would entail."

"Mayawati, pointed out that the arrears were estimated at about Rs 14800 crore, the
annual burden on the state exchequer would be about Rs 5200 crore". "But we will make it a
point to meet that by enhancing our pending recoveries and by plugging wastages. Rest
assured, we will not levy any fresh taxes on the people of the state".

Controversy related to Pay Commission

Several government services, most notably the armed forces have complained bitterly of
down gradation due to pay commissions exceeding their brief, and introducing anomalies in
the relative scales of pay of government services. At present, the armed forces have
represented to the government for the removal of anomalies which it is felt that the civil
servants on the commission have deliberately introduced to upgrade themselves vis-a-vis
service officers in the defence forces.

Impact of Pay Commission in Government

 Why was there a hue and cry about the Fifth Pay Commission?
The implementation of the Commission's recommendations ravaged the finances of the
central and state governments.
The central government declared salary and allowances hikes for its approximately
3.3 million employees, and insisted that the state governments too revise the pay of their
employees as per the Commission's recommendations.
The result, Before the Fifth Pay Commission recommendations came into effect, the
central government's wage bill (including pension dues of Rs 50.94 billion) stood at Rs
218.85 billion in 1996-1997.
It shot up by nearly 99 per cent to Rs 435.68 billion in 1999-2000.
 What about the state governments?
The state governments' wage bill went up by 74 per cent to Rs 89,813 crore (Rs 898.13
billion) in 1999 from Rs 51,548 crore (Rs 515.48 billion) in 1997.
Economists say that almost 90 per cent of a state's revenues go into paying salaries.
The impact of the Fifth Pay Commission was so brutal that some 13 states did not
have money to pay salaries in 2000.
So peeved were some state governments that last year states like West Bengal, Bihar,
Orissa, Assam, Manipur, Meghalaya and Mizoram sought a mechanism under which the
Centre could not announce a pay revision without consulting the states.
They also sought the Centre's help in offsetting the impact of the Fifth Pay
Commission and a national wage policy to replace pay commissions.

 The Fifth Pay Commission just recommended hiking salaries of

government employees?
The government only implemented the monetary benefits part. Some of the Fifth Pay
Commission's other recommendations included slashing the government workforce by 30 per
cent; abolishing 350,000 vacant posts and reducing the number of pay scales from 51 to 34,
none of which were implemented.
The Commission also suggested that the grant of salary hikes to employees be linked
to issues of downsizing government, efficiency and administrative reforms.

 Did the Fifth Pay Commission affect the economic reform process?
The jury is out on that. But two years ago, the World Bank held the Fifth Pay Commission as
the 'single largest adverse shock' to India's strained public finances.
The global body said India's civil service was 'not unduly' large, but there was a 'pronounced
imbalance' in the skills.
In its review, the Bank added: 'There is a pronounced imbalance in the skills mix
since 93 per cent of the civil service comprised class III and class IV employees for both the
Centre and various states.'

 What led to the Sixth Pay Commission?

For the last four years, Communist leaders and trade unions have been demanding the setting
up of such a commission. In 2005, the government set up a committee to study the demand.
The committee, headed by Cabinet Secretary B K Chaturvedi, turned down the
request for constituting the Sixth Pay Commission. The committee said the Centre might not
be able to bear the additional burden and the states were just recovering from the impact of
the Fifth Pay Commission, whose recommendations were implemented in 1997.
The Twelfth Finance Commission also urged the government to stop the practice of
increasing salaries by appointing pay commissions every 10 years.

 Why the turnaround?

This is what Prime Minister Manmohan Singh had to say in early 2006: 'We have decided
this. The last pay commission was set up in 1994. The time has now come for a new
commission. We are preparing for it.'
Congress sources say the rising political pressure from the Communists -- key
partners in the United Progressive Alliance coalition -- has prompted Prime Minister Singh to
announce the new pay commission.

 Why the turnaround?

New Delhi now argues the Sixth Pay Commission will not adversely affect the states as they
are sitting on cash surpluses. Finance Minister P Chidambaram's Budget 2008-09 had hinted
that the financial impact of the Sixth Pay Commission would be about 0.4 per cent of Gross
Domestic Product, similar to the Fifth Pay Commission award of 1996. Given that the Budget
2008-09 has projected GDP at Rs 5,303,770 crore (Rs 53,037.70 billion) in 2008-09, the
impact of the award may well be Rs 21,215 crore (Rs 212.15 billion).