The central government has awarded an average of 23.5% hike in salaries, allowances and pensions for more than 4.7 million central government employees and 5.3 million pensioners as per the recommendations of the Seventh Pay Commission, headed by Justice Ashok Kumar Mathur. The revised pay structure is effective from January 2016 and seven months arrears were paid at one go with the salary of August 2016.
The Pay Commission recommended 23.55 percent overall increase in salaries, allowances and pension. This is estimated to put an additional burden of Rs 1.02 lakh crore, or nearly 0.7 percent of the GDP, on the government. Of this, the increase in pay would account for Rs.39,100 crore, increase in allowances for Rs.29,300 crore and increase in pensions for Rs.33,700 crore.
The minimum pay is recommended to be set at Rs 18,000 per month which is more than double the present Rs 7,000. The maximum pay is set at Rs 2,25,000 per month for apex scale and Rs 2,50,000 per month for cabinet secretary and others at the same pay level (as against the current Rs 90,000 per month). In order to bring in greater transparency, the report also recommended replacing the present system of pay bands and grade pay with a new pay matrix.
The commission recommended abolishing 52 allowances altogether. Another 36 allowances have been abolished as separate identities but subsumed either in an existing allowance or in newly proposed allowances. Furthermore, it talks about the introduction of Performance Related Pay (PRP) which is to be subsumed within existing bonus schemes. The centre announced the setting up of an ‘Anomaly Committee’ to settle issues arising out of the implementation of the Seventh Pay Commission’s recommendations.
Impact on Economy
The pay hike for central government employees will trigger pay hikes for state government employees as well. The Seventh Pay Commission will have substantial effect on the economy, the major ones being rise in consumption, savings, rise in prices of commodities, higher tax revenues for the government and most importantly a momentum in economic activities.
It will trigger higher domestic consumption. Demand for cars and houses is expected to go up, tempting banks to lend more, which will energise the banking industry. Consumer demand for durables will also increase in this period and propel growth in the industrial sector.
Impact on fiscal health
The government’s fiscal health may take a beating as the fiscal deficit may go up slightly to accommodate increased salary and pension payments. Rs 73,650 crore of the outgo will be borne by the general budget and Rs 28,450 crore by the Railway Budget. The actual bill will be larger since there is also the OROP — one-rank-one-pension — payout to be added to this.
This payout is going to increase the general expenditure of the government. When these recommendations were made, inflation was moderate. But the actual implementation of these recommendations is coming at a time when inflation is rearing its head again. So, there are chances that a spike in demand may just push the inflation further up in the short term.
But the fortuitous combination of circumstance of low commodity prices, excess capacity in industry, moderate inflation, is just the right economic environment in which the Seventh Pay Commission’s bounties will do less damage to the exchequer and fiscal prudence. In fact, this dash of additional expenditure may be just the prod required for restarting the virtuous cycle of consumption, investment, growth and profits. Thus, the net impact of the implementation of the recommendation is going to be positive on the economy.