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DEAR ALLOWANCE

There were reports of a dearness allowance freeze for government employees, and this has now been denied. No such proposal has been mooted by the finance ministry. The proposal was discussed at a meeting of state finance ministers and no decision was taken. It may be discussed again when the prime minister meets chief ministers on October 18. But if citizens expect such a freeze, they are misguided. If one includes the public sector, the government (Centre, states and local bodies) employs 20 million people in India. Of these, 3.2 million are employed by the Central government. Most of this 20 million are based in urban India and constitute the middle class. The finance ministerís agenda is to cater to this class. After all, 20 million is one-third of urban India. It also has high decibel levels, so government employee interests take priority over the 400 million who work outside the government. Over-staffing within the government can be conservatively estimated at 10 per cent. Barring bans on new recruitments, there has been no actual downsizing within the government. Whether it is the fifth pay commission or reports of the expenditure reforms commission or promises made in budget speeches, salary hikes occur. But nothing has come of the idea of identifying surplus manpower, transferring it to a surplus pool and retrenching through voluntary retirement schemes, if retraining is infeasible.

The most citizens can expect is a 10 per cent reduction over five years, thanks to natural attrition of two per cent annually. At the Central government level, the issue is more a signal. Compared to interest payments, subsidies and defence expenditure, DA is a mere trickle. The other proposal, which has also now been denied, would have had more impact. This is a proposal of reducing the retirement age to 58 years. Various counter-arguments to justify 60 years are floating around. These are hogwash and the main reason is a one-shot increase in retirement benefits, which the government can ill afford. While DA freezes, lowering of retirement ages and accountability may not be quantitatively significant for the Centre, they are exceedingly important in rehabilitating state government finances. Between two-thirds and three-fourths of a stateís receipts are spent on wages, salaries and pensions. Had states not emulated the Centre in implementing the salary hike proposals of the pay commission, the present mess would not have occurred. Citizens expect the government to spend on social and physical infrastructure and most such sectors are state government subjects. Instead, the government continues to spend on unproductive government employees. This predatory state has been the bane of Indian economic policy-making and imposes transaction costs on the rest of the economy. Such allowances are extremely dear.

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