Higher Salary May Lead to Bankruptcy of States

How long a govt facing huge fiscal deficit can afford to pay higher salaries to its employees? The question assumes significance after the report of seventh finance commission. With a 25 percent hike in salaries of over 50 lakh central govt employees and equal number of about 54 lakh pensioners, the financial burden on union govt is likely to be over 1.05 lakh core. And this burden is likely to substantially up after  states pay enhanced salaries to its employees. Overall, the multiplier effect of the babus' salary hike will be colossal and even may lead to " financial bankruptcy" of cash-strapped states. Punjab has yet not  released the full and final arrears of sixth pay commission to its employees. It is even finding it hard to pay the retirement benefits and granting extension in service to retiring babus. Moreover, the higher  wages of govt employees may boost the conspicuous consumption.The middle classes are considered more spend thrift than thrift saving. This may put pressure on prices. Prices of food grains are already sky-rocketing. Even the prices of seasonal vegetables and fruits haven't come down despite low fuel prices. There is an old saying that "cut your coat, according to cloth". This proverb aptly describes the  reckless policies of Indian ruling class. The govt of the day has, practically, been  buying elections by increasing wages and, in the process, overburdening the country with debt. Most of the states are paying the salary and pensions by  raising public debt. Almost none of this money is going to growth and development. Soon after the acceptance of sixth Pay Commission recommendations,  a study by CRISIL  pointed out  that state governments found  it difficult to bear the financial burden of Sixth Pay Commission. The CRISIL estimated that after implementing the sixth Pay Commission recommendations, the aggregate primary deficit levels of 21 large states  increased  as much as 3.1 per cent of their aggregate gross state domestic product (GSDP). This level  was higher than the 2.6 per cent recorded in 1999-2000, the first year in which the full impact of salary and pension hikes was felt in the wake of the Fifth Pay Commission. This was also more than thrice the figure of 1 per cent targeted by the Twelfth Finance Commission (TFC). Fitch Ratings has warmed that hiked wages could hurt the country's finances and underscore the weakness in its sovereign credit profile. Most of the states, usually, follow central norms in fixing pay scales for their employees. As such, States have been demanding centre to  compensate them for implementing pay scales as recommended by the central pay panel. Congress-ruled state governments such as Assam, Karnataka, Manipur and Himachal Pradesh had  sought from 14th Finance Commission to adequately compensate those state governments which wished to implement the recommendations of the seventh pay commission. However, Commission didn't compensate them. The end-game will be States will be overburdened with debt or at times  may find it hard to  release salary and pensions in time. Punjab is already passing through this critical  situation. Mind you, such a situation can't save the state from being bankrupt.