Decompression of wages
Broadly speaking, wages of government employees in India are too high at the junior levels and too low at the senior levels. Before the 6th pay commission, the wage ratio of the top to the bottom was 10.7. My rough thumb rule is that by comparison with the labour market at large, wages at the bottom are 2x to 3x too high, and wages at the top are 3x to 10x too low. If such adjustments are made, the top to bottom ratio would rise to something like 45.
How do I know so clearly that at junior levels, salaries in government are 2x to 3x too high? Some time after I left the Ministry of Finance, one day, I encountered a chap who had once been my driver while I was there. I asked him how he was faring and he said things were not good at all. He had been assigned to a certain JS who was not nice to him. So he outsourced his job. The government pays a driver perhaps 3x higher than the public market price of a driver. So my ex-driver recruited a driver from the public market, sent him in to work every day in his place, and pocketed a neat profit off the wage differential (even after some money was paid to people in the payroll department to keep them quiet).
The 6th pay commission has made progress on increasing inequality by getting the ratio up to 12. But this is tiny progress when compared with the scale of the problem. From 10.7 to 12 is progress, but is just not enough when compared with a normative goal like 45.
Under their proposal, the salary of a Secretary goes to Rs.80,000 a month. This is small progress. In my mind, a number like Rs.300,000 a month would have been about right.
Treatment of regulators such as SEBI
The 6th pay commission has made genuine progress on delinking wages of the chairman and members of independent regulators, such as SEBI, from government wages. Their proposals (page 632) envisage a CTC for the chairman of Rs.300,000 a month and Rs.250,000 a month for the member. I think this is about right. This could be a breakthrough for addressing the HR problems of independent regulators in India.
In 2005, I had done a presentation at Centre for Policy Research where I had said that the price at which it was not hard to recruit good quality EDs at SEBI was Rs.100,000 a month plus house plus car. With the above revision of wages for the chairman and members, we're about there in terms of getting the price of the ED right.
As far as I could see, RBI is not listed in this special treatment.
There is a certain sense of entitlement about civil service wages having to go up through time. I think this is the wrong way to think about it.
When a government buys (say) steel, it sets an objective technical benchmark of what kind of steel is required, and then sources it at the lowest possible price from the open market. The government is willing to pay market price - and no more than market price - when buying steel of the required technical attributes.
This is exactly how the private sector labour market works. The price of a driver of acceptable quality in Delhi is probably Rs.4,000 a month, and a private employer would not pay more than Rs.4,000 a month to get a driver.
When the State is engaged in the production of public goods, there is no reason why the same style of procurement should not be applied for labour. Civil service HR policy needs to recruit the required technical capability at all levels, and pay the L1 price in order to get there. As an example, large corporations use salary surveys by HR companies in judging (say) the price of a personal assistant in Bhopal. Similar methods can be used by the State.
If this strategy is encoded into the civil service HR process, then the periodic resetting of wages by a pay commission would not be required. Instead, benchmarking to wages in the overall labour market would be an ordinary part of the year-by-year wage adjustments, as is the case with the private sector, and as is the case with steel.
Implications for NPS
The New Pension System was excluded from the terms of reference of the 6th pay commission. With a 20% contribution rate from civil servants into NPS, the flow of contributions will rise considerably owing to the wage hike.
I don't think anyone understands the impact of this on the consolidated expenditure of centre, states, local government, autonomous bodies, grant-in-aid institutions, etc.