Engaging India is an online column analysing the issues, trends and forces behind the business and politics shaping India and its impact on the world. Engaging India appears on Thursday mornings exclusively on FT.com India, a dedicated online section on India, and is written by Jo Johnson, the Financial Times' South Asia bureau chief; Amy Yee, New Delhi correspondent; and Joe Leahy, Mumbai correspondent.
Most visitors to India remember their first brush with the country's labyrinthine bureaucracy.
Mine came when I went to pick up a parcel from the international branch of the Mumbai post office. The staff waved me to sit down. Realising I was in for a long wait, I took out my laptop and began working at one of a long row of empty, neglected looking tables.
After several hours, a man officiously ushered me away from the desk, saying the tables were reserved for 'officers' only. The officers duly appeared, sat down, had a cup of tea and then disappeared for lunch, without returning.
India has many talented and hard-working civil servants who are impressive for their dedication and intellect. But equally, it has many of the type described above, who treat their jobs as a place to collect a stipend and catch up on the latest gossip.
Now India is grappling once again with the problem of how to provide the right incentives to turn its civil servants into what their title would suggest - public servants.
Including those at central, state and local government and state-owned enterprise levels, the civil service numbers about 18m people - a figure approaching the population of Australia.
That size also makes them the most important group of workers in the country. Last week, the Sixth Pay Commission, a body that reports to the government only once a decade, recommended that the central government award its 4.5m employees a 28 per cent increase in basic salaries and pensions.
The recommendations, which are to be implemented retrospectively as from January 1, 2006, are likely to be followed by most of the rest of the public service.
It is not clear why the Indian government undertakes a comprehensive review of public service salary structures only once a decade. But the sheer scale of the exercise and the pent-up demand for large wage increases after such a long period of inflation-linked increments means there is always a threat that the process will disrupt the economy.
That is exactly what happened after the last such pay rise in 1997. The government's budget deficit leapt from 7.5 per cent of gross domestic product to over 10 per cent and remained at about that level for the next four years, according to Sonal Varma, economist at Lehman Brothers.
This time, India's economy is stronger, with GDP growing at an average 9 per cent a year over the past few years. But the latest pay increase is still coming at a sensitive time for the economy, with signs that growth is coming off the boil. At the same time, the government is expanding its largesse as it prepares to fight a number of elections over the next 14 months.
Morgan Stanley estimates the combined effect of the pay commission's recommended salary increase, coupled with a recent budgetary measure offering Rs600bn ($15bn, Euro9.6bn, £7.6bn) of debt relief for farmers, could push up the government's consolidated budget deficit to 8.1-8.3 per cent of GDP in the financial year ending March 2009. This compares with a trough of 7 per cent in the fiscal year ended last month.
This is troubling for several reasons. First, it will mean less money for development spending over the next few years - something India's neglected education system, rural hinterlands and crumbling infrastructure desperately need.
Second, while it could provide a stimulus for the economy, it is also likely to fuel inflation, thereby counteracting efforts by the Reserve Bank of India, the central bank, to keep a lid on prices.
Driven by high global commodity prices and infrastructure and other capacity bottlenecks, inflation hit a 13-month high of 6.7 per cent in mid-March. That was in spite of the RBI keeping interest rates at a peak of 7.5 per cent. The RBI may now have little choice but to raise rates, potentially further damping economic growth, which has already slowed from an annual rate of almost 10 per cent to less than 9 per cent.
"Given loose fiscal policy due to spending pressures, the onus will fall on monetary policy," Tushar Poddar, a Goldman Sachs economist, wrote in a report. That is bad news for India's middle classes, who are already suffering from high interest rates on mortgages and car and motorbike financing.
Even so, private sector employees can hardly begrudge their public sector peers a decent pay-rise other than one indexed to inflation alone for 10 years. India's private sector office workers have been receiving 10-15 per cent annual salary increases over the past few years - among the highest in the world.
There is a silver lining for customers of public services from the Sixth Pay Commission's findings. Perhaps mindful of the sort of experience I had at the post office, the commission recommended that the government begin experimenting for the first time with performance incentives.
These are very modest amounts. The top 20 per cent of employees in each pay band, or level, of the civil service will receive a 3.5 per cent annual increase rather than the 2.5 per cent awarded to average employees. Something, though, is better than nothing.
As for me, I left the post office empty-handed that day. But to my surprise, a few months later the long-forgotten parcel turned up at my office. Who knows what India's civil service could deliver with just a few decent incentives.
