The Sixth Central Pay Commission has adopted a dal-chawal approach to ‘pricing’ the central government employees. Literally: as at the centre of its report is a table of ‘essential’ commodities with the quantity requirements, prices etc., used by the commission to arrive at the benchmark ‘cost of living’.

If governance and delivery are indeed important in the scheme of things, as being proclaimed at times, it will be an amazing miracle how the dal-chawal indexed babus will take the country forward in the 21st century and beyond! Given that over a billion people use and directly or indirectly pay for government services, the report, as expected, has evoked an intense, passionate debate.

While the macro outlook of the commission is benchmarked to the ‘just-above-poverty line’, the micro concerns of redistributing this ‘poverty’ in an unequal manner among the various classes and sub-classes of employees make interesting reading.

Public reactions to the report have generally used the argument of equity in assigning a fair price for the babus. Some of them have demanded parity in prices for different classes of employees within the government and also parity in comparison to prices such babus can command elsewhere: from domestic corporate — public and private — sector to global markets. Some others have demanded parity with the output they deliver; to the price the society is capable of paying and to the general standard of living in the country. While the media is awash with these equity concerns, we look at the issue of ‘fair price’ from the perspective of the 21st century when technology and markets have made the world almost flat.

Government is a standard input-output conversion system. It hires funds, labour, etc., for a price, converts these into services, and provides these services for a price. It is, however, different from similar other systems in the sense that it is generally a not-for-profit, monopoly supplier of public goods.

Though there may not be a quid pro quo between the payments made and services used by an individual, there cannot be a better quid pro quo relation from the perspective of the society as a whole. The society pays for the government services in a variety of forms and thereby indirectly pays for all inputs, including labour; government hires to produce these services.

India embraced economic liberalisation in a meaningful sense from early 1990s. It essentially meant transition to a market-based delivery system. Market delivers best if the price is right. The outcome is sub-optimal if the price is wrong. One of the key requirements of discovering right price is that every participant in the market is a price taker.

Take the example of financial market which discovers the price of funds. Government raises funds at a price discovered by the market. The price discovered for funds raised by central government is generally the lowest reflecting better comfort for the supplier of funds. This forms the benchmark for the funds raised by state governments and different grades of corporates. Instead of taking the price discovered by market, if government wishes to set the price, it will be priced out of the market. This happens because our financial market is reasonably efficient and transparent.