wage restraint as a policy action can be traced back to germany, a european country that has trumped china (the so-called ‘factory of the world’) in terms of positive balance of trade. germany is a net exporter and its economy is one of the most stable and commanding. the edge was attained on the back of curbing any imprudent rise in wages of the working class.
on the contrary, asia’s third largest economy, india, never cared about the rising government bill on account of salaries.central government employees or those of state governments or public sector undertakings, including banking companies, are paid salaries that are not proportionate either to their labour or to the financial capability of the employer.
why do we have a current account deficit? simple, our exports are less and we import more. let us go in some detail. since our wages are high our exports become expensive than those by other countries where wage restraint is exercised. also, since the spending capacity of the middle class has seen an upward trend, all owing to rash pay hikes, we import more to satisfy our consumption needs.
this means the senseless hikes in salaries (and we talk here of public servants since they set the benchmark for the private sector) is dealing a blow to both, exports as well as imports, thus comes the current account deficit that calls for frequent high-level meetings and unattained commitments.
the recently adopted 7th pay commission recommendations have only upped the bill of the government and the states have followed suit. what you have done is you have only increased the spending capacity of public servants, which was totally uncalled for. and then you have assigned a foolish task to the central bank to limit inflation within the agreed percentage.
the effect is the rbi is struggling with the policy rate-inflation maths. what needs to be a simple policy action of rationalizing salaries of public servants (since private sector is run on market economics) and shunning the practice of setting up of pay commissions or at least mandating them to follow prudent economics while suggesting any hike has gone to become a puzzle that the cabinet, central bank and policy think tanks have been unable to decode.
indeed, india cannot be expected to copy exactly the same german wage restraint model; it has to be tailored according to our national scene and priorities, even political compulsions.