Indian economy is growing at a fast pace now and Indian decision makers and media are excited about this growth.
Professor Joseph Stiglitz told the BBC News website that globalisation had led to lower tariffs, an important source of public revenue.
"A decline in tariff leads to less money for the governments to spend on its people," Professor Stiglitz said.
He won the Nobel Prize in 2001 for his work on the economics of information.
This is bad news. Indian government still controls much of Indian economy. Thousands of people are employed by the government. Also, Indian government provides some subsidies for the poor people. So, if the government loses revenue then millions of people will suffe
r.
Read this brilliant article by Sh. Sumit K. Majumdar, plulished in the Hindu Business Line dated June 23, 2006. I am reproducing the same article here to read be all. This is certify that the original article as posted in the Hindu and I am just reproducing with thanks.
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India must pay for good governance
Sumit K. Majumdar
In the last 25 years, civil service salaries have risen substantially. Yet, they are no comparison to private sector wage levels that have risen a hundred times in the same timeframe. The price of such disparities is psychological dysfunction among civil servants who are capable and highly motivated. India cannot short-change good governance. The prognosis for India's governance looks bleak, as good candidates for superior civil service jobs seek alternative careers.
Pegged at extraordinarily generous rates by Lord Cornwallis so as to eradicate corruption indulged in by the employees of East India Company, the salary scales of civil servants provided the motivation for generations of British and Indian men to seek employment in India's civil services.
The Indian Civil Service (ICS) was one of the best-paid jobs on earth. In 1805, a Collector of Madras Presidency was paid Rs 2,500 a month — a gigantic sum by today's standards. If prices have risen by 200 times in the last two centuries, then that salary today is worth at least Rs 500,000.
As late as 1980, when the last serving ICS officer, N. K. Mukherjee, retired as the Cabinet Secretary, his monthly salary of Rs 4,000, though having stayed static for that level of appointment for two centuries, was adequate. Private sector salaries were such that senior functionaries were paid about Rs 10,000 a month. In the last 25 years, civil service salaries have risen substantially. The Cabinet Secretary is now paid ten times what his previous generation counterpart was. Nevertheless, what has risen more substantially is the level of salaries paid in India's private sector. They have risen by a hundred times in the last 25 years. The wage disparity is huge and has psychological consequences.
Facts from Yesterday
In 1947, a mid-level District Collector would have been paid Rs 2,000 a month while his Commissioner would draw Rs 3,500. The Chief Secretary of the Madras Presidency would be paid Rs 3,750. An ICS Member of the Governor's Executive Council would be paid Rs 5,000 a month, while the Governor of UP was paid Rs 10,000. For 1947, these were large sums.
At that time the Reserve Bank of India Governor was paid Rs 7,500 a month, while a Secretary and Treasurer of the Imperial Bank, the precursor of the State Bank of India, was paid Rs 4,000. Comparably, the best private sector company would pay its general manager Rs 5,000 and its Managing Director Rs 6,000 a month. Government pay was outstandingly handsome.
Some Facts Today
Today a 35-year-old District Collector is paid Rs 20,000 a month, a 50-year-old Secretary to a State government gets Rs 34,000 and the Chief Secretary Rs 38,000. The RBI Governor and the SBI Chairman do just a bit better at about Rs 44,000.Now, look at private sector salaries. A brand new graduate joining a call centre gets Rs 20,000, while a 30-year-old Systems Analyst is paid Rs 60,000 per month. What will motivate youth to join in national governance?
At upper levels the situation is extraordinary. A private sector general manager is paid Rs 300,000 a month. Compare the salary of his college mate who got into the IAS. But look at the disparity between the salary of an Executive Director of a private sector bank, probably paid about Rs 10,00,000 a month, and that of the RBI Governor.
Or, for that matter between that of the CEO of a private sector company, probably paid Rs 15,00,000 a month, and that of the Chief Secretary of a State. In the financial sector the disparity ratio is over 20; in the last case the disparity ratio is 40!
Challenges of Economic Emancipation
In the last decade India has embarked on a journey of liberalisation in which the role of market is absolute. The private sector salary rates represent the forces of demand and supply. Price and wage controls cannot be resorted to because the capping of private sector wages leads to retardation of incentive to work. Controls have dysfunctional consequences, as witnessed for a major part of India's contemporary history. The supply side revolution, well under way, will be stopped in its tracks if controls are applied. Yet, as British mathematician-philosopher Alfred North Whitehead had remarked: "The major advances in civilisation are processes, which all but wreck the societies in which they occur." The runway wage inflation in the private sector, reflecting the working of a free-market economy, can have dysfunctional consequences and wreck the process of societal evolution. With that the quality of governance would go downhill. The question is how much is to be paid for good governance? Very large amounts. Lord Cornwallis had recognised this in the 1790s. How do we handle the conundrum today? If today's civil servants are paid a tenth or less of what their private sector colleagues earn, who can blame them if they are de-motivated?
If India wants good governance it has to pay for it. If, following the efficiency wages hypothesis, low wages will attract only unworthy candidates. Thus, the prognosis for India's governance looks bleak, as good candidates for superior civil service jobs seek alternative careers.
Pay Commissions
Initial thoughts on a pay commission would be that its report would be simple. It would simply increase all government sector salaries at least ten times. While that would be easy, it would be disastrous for the government that would disappear under its fiscal obligations.
The burden of supporting several million employees at vastly enhanced rates of pay is a recipe for disaster. Yet, this potential liability has to be met head-on and budgeted for. A way out is the significant shrinkage of employment in Groups B, C and D. This would be impossible for reasons political.
A pay commission could also recommend that a large fund be set up to implement golden handshakes; this amount be treated as an investment and accordingly budgeted for. The subsequent reduction in manpower would lead to significant savings.
The next Pay Commission should address the disparities in salaries. It also needs to increase by a factor of at least ten the salaries of Group A employees. Even then the senior civil servants will be earning a third or half of their private sector counterparts. It must deal with the re-structuring of the government machinery.
The price of wage disparities is psychological dysfunction among civil servants who are capable and motivated. As the supply of capable and motivated civil servants dwindles, the price could be anarchy. Serious thought must be given to the question of how much India pays for good governance.
(The author is Professor of Technology Strategy, University of Texas at Dallas)
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