With the government accepting the pay- and pension-related recommendations of the 7th Pay Commission with a slight betterment of the commission’s package for specified cadres of armed forces, over 1 crore central government staffers and pensioners will get an additional Rs 84,933 crore as recompense in FY17 — 19.6% higher than in a business-as-usual scenario. The largesse, though much lower than in the generous 6th pay panel’s award (which brought about a hefty and historic 54% “real hike” in pay compared with the current panel’s 14.3%), would still provide some boost to consumption and savings, but policymakers said its inflationary impact would be minimal.
Finance minister Arun Jaitley said the Central Pay Commission’s recommendation for a 63% rise in allowances (which would have inflated the Centre’s and railways’ outgo by R29,300 crore) has been put on hold until a finance secretary-led committee reviews this along with the commission’s suggestions for an overhaul of the 196-odd such benefits. He said the fitment factor of 2.57 proposed by the commission for pay and pension has been accepted, while the index has been improved to 2.67 for brigadiers and additional stages provided for lieutenant colonel and colonel to bring parity with their counterparts in paramilitary forces. Annual increment has been retained at the current 3%.
Although the central government staff’s extra spending due to the latest pay panel award would form only a tiny part of the aggregate demand, consumption would get a further fillip as the state governments and central/state PSUs will most likely follow suit with similar pay increases in staff remuneration. But the impact of these follow-up steps would be felt only in FY18, analysts said, adding that pay increases commensurate with the central staff’s would imply an annual outgo of R2.3 lakh crore by states and PSUs.
Of the Rs 84,933-crore hit on the exchequer this year, a recurring expenditure of Rs 72,800 crore is due to pay and pension while R12,133 crore is earmarked to pay arrears from last financial year (the panel’s award will take effect from January 2016). The burden will be shared between the general and railway budgets, in a roughly 10:4 ratio.
Officials said the pay panel-induced consumption increase could be partially offset by the resultant cut in government’s capital expenditure to tread the fiscal road map. A finance ministry official on condition of anonymity said that while Budget FY17 did not provide any explicit provision for pay panel, some Rs 54,000 crore was built into the allocations to various ministries and Rs 20,000 crore in the rail budget, adding that additional amounts will have to found in both general and railway budgets.
The Cabinet accepted the 7th Pay Commission’s proposal that the present system of pay bands and grade pay be supplanted with a new pay matrix, wherein grade pay is subsumed. The status of an employee will now be determined by her level in the pay matrix.
The minimum pay for the lowest level staff will now be Rs 18,000 per month (Rs 7,000 earlier); the apex pay (drawn by secretaries to the government) will be Rs 2,25,000 per month and the pay of the Cabinet secretary will be Rs 2,50,000 per month. While the 5th and 6th commissions had worked on the principle of reducing the differential between the remuneration of the government and private-sector employees, the latest pay commission acknowledged the fact that at the lower levels government staff are better paid.
According to a study by the IIM-A assigned by the commission, the total emoluments of a general helper, the lowest-ranked employee in the government, is more than two times the emoluments of his private-sector counterpart. Also, as the commission pointed out, “a mere comparison of the salaries should not form the benchmark for remuneration, it is to be viewed keeping in mind the uniqueness inherent in the government in terms of security of tenure, assured prospects of financial progression even when no promotional avenues exist, leave and pensionary privileges which are not available to their counterparts in the private sector”.
While it is rumoured that the government might pay allowances only prospectively, if it decides otherwise and payments are made in the current year, the exchequer will face additional pressure. The panel had estimated the total expenditure to be borne by the general and rail budgets in FY17 to implement its proposals at Rs 1,02,100 crore.
Analysts put out figures on the consumption and savings boost from pay panel.
According to India Ratings, thanks to development, consumption will increase by 0.3% of GDP and savings by 0.2% of GDP. “Ind-Ra believes that after the sharing of central taxes with the state governments, the central government’s net tax revenue will increase by 0.09% of GDP in FY17,” it said.
While private consumption expenditure had already gained pace in 2015-16, investments are hard to come by. Private final consumption expenditure (PFCE) rose 7.4% in 2015-16, the highest in the current GDP series and compared with 6.2% in the previous fiscal. PFCE accounted for 55.5% of GDP in 2015-16. Growth in government final consumption expenditure dropped to just 2.2% in 2015-16 from as high as 12.% a year earlier.
Commenting on the pay panel award submitted to the government in November last year, the Economic Survey 2015-16 had said in February that retail inflation would remain in the 4.5-5% range in 2016-17, within the central bank’s target of 5% by March 2017, despite an expected spiral in wage costs following the implementation of the commission’s recommendations. Citing the subdued impact of the 6th panel on inflation despite higher wages (CPI-IW inflation remained around 7% for almost a year in 2008 when the government started to implement the last panel’s recommendations), the survey argued that the effect of the current panel’s suggestions on inflation would also be minimal. However, it admitted that a sharp increase in public sector wages could affect inflation if it spilled over into private sector wages and, hence, private sector demand. “But currently this channel is muted, since there is considerable slack in the private sector labour market, as evident in the softness of rural wages,” it said.