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Seventh Pay Commission: Insights into the developments


The Cabinet recently accepted the recommendations of 7th Pay commission. Let’s look into the hikes and sighs of what this brings forth. We will start with the basics of a pay commission and then will top it up with analysis, issues and challenges ahead.

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 government constitutes the Pay Commission almost every 10 years to revise the pay scale of its employees and often these are adopted by states after some modifications
  • 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, third Pay Commission in April 1970.
  • The recommendations of the Fourth Pay Commission covered the period between 1986 and 1996. The Fifth Pay Commission covered the period between 1996 and 2006.
  • The Union Cabinet approved the setting up of the 6th Pay Commission in July 2006.

Information about 7th Pay commission

Seventh pay commission was formed by previous UPA Government. The commission, headed by Justice A K Mathur was formed in February 2014. The other members of the commission are Vivek Rae, a retired IAS officer, and Rathin Roy, an economist. Meena Agarwal is Secretary of the Commission. The committee’s recommendations are scheduled to take effect from 1 January, 2016. Nearly 48 lakh central government employees and 55 lakh pensioners will be benefited by the pay commission.

Key Recommendations of the 7th Pay commission

  • 55 percent overall hike in salaries, allowances and pension involving an additional burden of Rs 1.02 lakh crore or nearly 0.7 percent of the GDP.
  • Average salary hike includes 14.27 percent increase in basic pay, the lowest in 70 years. The previous 6th Pay Commission had recommended a 20 percent hike which the government doubled while implementing it in 2008.
  • Recommendations to be implemented from January 1, 2016
  • Minimum pay fixed at Rs 18,000 per month; maximum pay at Rs 2.25 lakh
  • The rate of annual increment retained at 3 percent
  • 24 percent hike in pensions
  • The Commission recommends abolishing 52 allowances; another 36 allowances subsumed in existing allowances or in newly proposed allowances
  • Recommendations will impact 47 lakh serving govt employees, 52 lakh pensioners, including defence personnel
  • One Rank One Pension proposed for civilian government employees on line of OROP for armed forces
  • Ceiling of gratuity enhanced from Rs 10 lakh to Rs 20 lakh; ceiling on gratuity to be raised by 25 percent whenever DA rises by 50 percent
  • Cabinet Secretary to get Rs 2.5 lakh as against Rs 90,000 per month pay band currently
  • Financial impact of implementing recommendations in toto will be Rs 1.02 lakh crore – Rs 73,650 crore to be borne by Central Budget and Rs 28,450 crore by Railway Budget
  • Total impact of Commission’s recommendation to raise the ratio of expenditure on salary and wages to GDP by 0.65 percentage points to 0.7 percent
  • Military Service Pay (MSP), which is a compensation for the various aspects of military service, will be admissible to the defence forces personnel only
  • MSP for service officers more than doubled to Rs 15,500 per month from Rs 6,000 currently; for nursing officers to Rs 10,800 from Rs 4,200; for JCO/ORs to Rs 5,200 from Rs 2,000 and for non-combatants to Rs 3,600 from Rs 1,000
  • Short service commissioned officers will be allowed to exit the armed forces at any point in time between 7 to 10 years of service.

Analysis

Significance of the 7th Pay commissions recommendations

1) Boost in demand

When over one crore government employees and pensioners will receive over a 23-per cent hike in salaries and pensions, it will boost the overall demand scenario in the economy, leading to more expenditure, thus benefitting the country’s gross domestic product (GDP).

2) Increase in Government Revenue

Both central and state government revenues are expected to get a boost from the implementation of this award, as a sizeable amount of the outgo in the form of pay will get ploughed back to government coffers in the form of income tax. Besides, with more money in their hands, people are going to spend and this increased consumption will directly add to the excise/VAT collections of central and state governments.

3) A savior amid global market turmoil

The seventh pay commission has rendered a much-needed relief to the market, concerned over a spate of issues from Britain’s verdict to leave the European Union, the prospects of US Federal raising interest rates, to concerns over FII outflows due to RBI Chief Raghuram Rajan’s disinterest for the second term.

4) Increase in saving

The consumption boost to the economy is estimated to be approximately Rs 61,260 crore (0.39 per cent of GDP) and increased household savings are estimated to be another Rs 40,840 crore (0.26 per cent of GDP). This will add to the savings-to-GDP ratio which, after reaching the peak of 36.8 per cent in 2007-08, declined to 30.1 per cent in 2012-13. This is also important from the point of view of the widening gap between savings-to-GDP and investment-to-GDP ratio which was reflected in the higher current account deficit.

Challenges

1) Fiscal deficit may widen

While the Budget for 2016-17 did not provide an explicit provision for implementation of the 7th Pay Commission, the government had said the once-in-a-decade pay hike for government employees has been built in as interim allocation for different ministries.

The government’s kitty is likely to have an additional burden of Rs 1.02 lakh crore, or nearly 0.7 per cent of GDP, which may make it troublesome for the government to meet its fiscal deficit target for the current financial year.

 

2) Inflation risk

RBI has repeatedly commented that it sees an upside risk to Consumer Price Inflation index (CPI) inflation on the back of 7th pay commission. Now that the reward is out, all eyes will stare at RBI as to how much spike it estimates on the CPI in its monetary policy review scheduled to be out on August 09


Do you have more to add? Chat it out in the comment box

Questions, suggestions and comments


  1. varun negi

    23.55% overall hike and not 55% as mentioned in the article.

  2. Shivam Varshney

    IMPACTS MAY BE ASKED AS PRELIMES ECO QUESTION…THANK YOU NICE ARTICLE

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