Central government employees celebrated this Independence Day with special verve, as they have just been given a pay hike that increases the government's annualised wage bill by about 17 per cent (though the government puts the total increase at 21 per cent that includes arrears).

The government has also announced 31 months' back pay, which is generous. All of this means many thousands of crores, but they are mostly provided for in the budget assumptions of last February.

The pay hike should not, therefore, cause cavil, as everyone agrees that government employees should be paid well.

Certainly at the senior levels, where the pay is derisive (though the perks are not), there has always been a strong case for paying more -- indeed, much more than what even the Pay Commission has awarded.

This is also true of the defence services, which people are increasingly reluctant to join. Even now, a brigadier in the army or a joint secretary in the government will earn little more than a junior manager in the private sector.

That is not good enough. At the same time, it is clear that a minimum salary at the bottom of the pyramid is much too high. It is about three times as high as the stipulated minimum wage in most parts of the country, and about twice as high as the reality in the open job market.

These differentials are even less justified when it is known that productivity and the quality of effort at these levels in the government are far from what they should be.

The problem comes with paying the bill. Immediately after the Budget, government officials had said that they had a cushion of about 0.4 per cent of GDP for the Pay Commission award, plus the Rs 5,000 crore (Rs 50 billion) provided explicitly in the railway budget.

The award now announced by the government (Rs 22,000 crore or Rs 220 billion in all, including the bill for the railways and the arrears payable this year) is in line with the anticipated numbers, so this should not prevent the government from staying within the projected deficit of 2.5 per cent of GDP.

The fiscal problem comes from the massive government loan write-off and the runaway subsidies.

The overall fiscal deficit, taking into account off-budget times, runs therefore to about 7.5 per cent of GDP, as the prime minister's Economic Advisory Council has just noted, and not 2.5 per cent. As a result, after 18 years, India is more or less back where it started on the fiscal front.

The blame for this must lie with an unusually profligate government. Pay hikes it could not avoid; but unbridled subsidies, loan write-offs and spendthrift ways it could have.

The problem is also that there has not been any forward movement on the last Pay Commission's recommendations on accountability and downsizing.

Even if one disagrees somewhat with the latter recommendation (because it can be argued that, in fact, there are too few government employees -- too few doctors, teachers, nurses, policemen, judges, etc -- and that faulty deployment must not be confused with size), the question of accountability remains.

It also needs to be asked why in India wage revisions for government employees happen only once in 10 years and not once in three or five years, since per capita incomes are growing at 6 per cent a year and within five years government salaries have lost touch with reality.

• How good is this pay hike of 21%?
• The Sixth Pay Commission