The Sixth Pay Commission submitted its report to Finance Minister P Chidambaram on Monday. The commission is headed by Justice B N Srikrishna. The recommendations of the commission, when accepted, would provide a bonanza to over 4.5 million central government employees.

So what is a Pay Commission? And what are its implications? Read on. . .

What is a Pay Commission?

The Pay Commission is an administrative system/mechanism that the government of India set up in 1956 to determine the salaries of government employees.

The First Pay Commission was established in 1956, and since then, every decade has seen the birth of a commission that decides the wages of government employees for a particular time-frame.

The second Pay Commission was set up in August 1957 and gave its report in two years. The third Pay Commission, set up in April 1970, submitted its report in March 1973.

The recommendations of the Fourth Pay Commission covered the period between 1986 and 1996. The Fifth Pay Commission covered the period between 1996 and this year.

The Union Cabinet, under the stewardship of Prime Minister Manmohan Singh, approved the setting up of the 6th Pay Commission to revise the payscales of central government employees in July 2006.

The 6th Pay Commission is headed by its Chairman Justice B N Srikrishna, and has Ravindra Dholakia, J S Mathur and Sushama Nath as its other members.

The Pay Commission was supposed to submit its report in 18 months.

Why was there a hue and cry about the Fifth Pay Commission?

Because the implementation of the Commission's recommendations ravaged the finances of the central and state governments.

The central government declared salary and allowances hikes for its approximately 3.3 million employees, and insisted that the state governments too revise the pay of their employees as per the Commission's recommendations.

The result: Before the Fifth Pay Commission recommendations came into effect, the central government's wage bill (including pension dues of Rs 50.94 billion) stood at Rs 218.85 billion in 1996-1997.

It shot up by nearly 99 per cent to Rs 435.68 billion in 1999-2000.

What about the state governments?

The state governments' wage bill went up by 74 per cent to Rs 89,813 crore (Rs 898.13 billion) in 1999 from Rs 51,548 crore (Rs 515.48 billion) in 1997.

Economists say that almost 90 per cent of a state's revenues go into paying salaries.

The impact of the Fifth Pay Commission was so brutal that some 13 states did not have money to pay salaries in 2000.

So peeved were some state governments that last year states like West Bengal, Bihar, Orissa, Assam, Manipur, Meghalaya and Mizoram sought a mechanism under which the Centre could not announce a pay revision without consulting the states.

They also sought the Centre's help in offsetting the impact of the Fifth Pay Commission and a national wage policy to replace pay commissions.

So the Fifth Pay Commission just recommended hiking salaries of government employees?

No, and therein lies the problem. The government only implemented the monetary benefits part.

Some of the Fifth Pay Commission's other recommendations included slashing the government workforce by 30 per cent; abolishing 350,000 vacant posts and reducing the number of pay scales from 51 to 34, none of which were implemented.

The Commission also suggested that the grant of salary hikes to employees be linked to issues of downsizing government, efficiency and administrative reforms.

Did the Fifth Pay Commission affect the economic reform process?

The jury is out on that. But two years ago, the World Bank held the Fifth Pay Commission as the 'single largest adverse shock' to India's strained public finances.

The global body said India's civil service was 'not unduly' large, but there was a 'pronounced imbalance' in the skills.

In its review, the Bank added: 'There is a pronounced imbalance in the skills mix since 93 per cent of the civil service comprised class III and class IV employees for both the Centre and various states.'

So what led to the Sixth Pay Commission?

For the last four years, Communist leaders and trade unions have been demanding the setting up of such a commission.

In 2005, the government set up a committee to study the demand.

The committee, headed by Cabinet Secretary B K Chaturvedi, turned down the request for constituting the Sixth Pay Commission. The committee said the Centre might not be able to bear the additional burden and the states were just recovering from the impact of the Fifth Pay Commission, whose recommendations were implemented in 1997.

The Twelfth Finance Commission also urged the government to stop the practice of increasing salaries by appointing pay commissions every 10 years.

So, why the turnaround?

This is what Prime Minister Manmohan Singh had to say in early 2006: 'We have decided this. The last pay commission was set up in 1994. The time has now come for a new commission. We are preparing for it.'

Congress sources say the rising political pressure from the Communists -- key partners in the United Progressive Alliance coalition -- has prompted Prime Minister Singh to announce the new pay commission.

What about the drain on government finances?

New Delhi now argues the Sixth Pay Commission will not adversely affect the states as they are sitting on cash surpluses. Finance Minister P Chidambaram's Budget 2008-09 had hinted that the financial impact of the Sixth Pay Commission would be about 0.4 per cent of Gross Domestic Product, similar to the Fifth Pay Commission award of 1996. Given that the Budget 2008-09 has projected GDP at Rs 5,303,770 crore (Rs 53,037.70 billion) in 2008-09, the impact of the award may well be Rs 21,215 crore (Rs 212.15 billion).

• Sixth Pay Commission: Coverage