Pay hikes may not have an impact on inflation: Finmin

Written by Sunny Verma | New Delhi, Aug 26 | Updated: Aug 28 2008, 05:16am hrs
The package of salary hikes approved by the Cabinet is unlikely to have any significant impact on inflation, which touched a 16-year high of 12.68% for the week ended August 9. Finance ministry officials feel that the economic impact of pay hikes has filtered through in the system as government employees are expected to have raised their spending plans in anticipation of the increased salary.

Although there is no data to project the increase in spending, the expectation is that government employees have altered their consumption matrix ahead of the likely increase salaries, a senior official said. The Cabinet, on August 14, had approved the recommendations of the Sixth Pay Commission with some modifications. The average increase of 21% in the salary of 54 lakh government employees would cost about Rs 15,700 crore on the Union Budget and Rs 6,400 crore on the Railway Budget in this fiscal.

The finance ministry feels that uncertainties regarding the impact of the salary hike on the inflation rate are very less. The revised pay scales will be effective from January 1, 2006 and the revised allowances, from September 1, 2008. Although the arrears alone are estimated to cost Rs 29,373 crore, only 40% of this amount would be paid in this fiscal.

An increase in resources at the disposal of people raises the level of aggregate demand in the economy, resulting in a higher inflation. However, the finance ministry estimates that this has already happened.

As far as economic affects (of salary hikes) are concerned, that has already been done, a finance ministry official said.

Finance minister P Chidambaram had said that the impact on inflation was factored into when the Cabinet cleared the report after the committee of secretaries suggested modifications on the report. The finance ministry had earlier expressed its disappointment over the rising inflation rate.

The ministry expects the inflation to head up until November-December and a sharp reduction is likely in March, unless there is any significant external shock. Inflation has hit a 16-year high, prompting the Reserve Bank of India to tighten the monetary policy, which has resulted in high interest rates. The government has also taken a slew of fiscal measures to tame inflation.