Fiscal implications of the DA merger

The merger of the DA with basic salary is worrying because of its fiscal implications. The current merger of 50 percent DA with basic pay implies that a current basic salary of Rs.20,000 with 59 percent DA will be raised to Rs.30,000 with 9 percent DA on the basic. This way the government will, in future, be paying a DA on what is today's DA.

Moreover, an increase in basic pay leads to an increase in pension liabilities and to other components of salary that are linked to the basic pay. In the case of defence a large number of allowances are linked to the basic pay. The move is therefore expected to have a large impact on defence spending. Further, the change in salary structure of central government employees normally permeates to other institutions such as universities and to states.

Some estimates suggest that this step will raise central government salary expenditure by Rs.4000 crore. Taking into account the total impact for states, salary spending is expected to rise by about Rs.15,000 crore. Thus, unless the government intends to cut staff, it is going to pay out an additional 0.5 per cent of GDP as salary to it employees.

We have seen earlier that while the government implemented the recommendations of the fifth pay commission regarding salaries, it did not go ahead with the downsizing of its staff as recommended. This played havoc with central and state budgets. Capital expenditure compression occurred as a result of the increase in revenue expenditure.

It is often argued that the rising fiscal deficit limits the ability of the government to invest in infrastructure. Today the issue is not only that of public investment. Certainly, infrastructure continues to suffer because of lack of public resources. Today the provision of basic public goods such as law and order, primary education, health and drinking water is at stake. The Delhi government talks about public-private bhagyadari in provision of public safety. States like Bihar find it difficult to pay policemen their salaries. When interest payments on past borrowing eat up more than half of tax collections, governments start losing the ability to govern.

Ila Patnaik

(The author is at NCAER. These are her personal views)