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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.
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.
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.
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
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