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7th Pay Commission will drain exchequer of Rs 1 lakh crore but boost private consumption demand and economic activity

The Confederation of Central Government Employees rejected the commission’s recommendation.

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It may be one of the lowest pay hikes for the Central government staff and pensioners in the last few decades, but the overall 23.55% increment in their salaries, allowances and pensions resulting from the clearance of the Seventh Pay Commission recommendations by the Union Cabinet on Wednesday would cost the government a whopping Rs 1.02 lakh crore.

Under the revised pay scale, the starting salary for a junior government official has been more than doubled to Rs18,000 per month from the current Rs 7,000 a month. For the Class I officers, it has been raised to Rs 56,100 per month.

The commission, which reviews the salaries of government staff every 10 years, has capped the government remunerations at Rs2.5 lakh per month, which is also over two times of today’s ceiling of Rs90,000 per month.

The increase in both salaries and pensions is 2.57 times more over the Sixth Pay Commission. The Cabinet also improved recommended salaries in defence to give a hike of 2.67 times as against 2.57 times to the civilians to ensure parity with the para-military forces. Those in the Armed Forces get the highest as their salary hike is from Rs 21,000 to Rs 31,500.

The commission’s recommendations would be implemented retrospectively from January 1. Among its other suggestions, which will affect 47 lakh government employees and 52 lakh pensioners, are retention of the current 3% increment rate, application of fitment factor of 2.57 for revision of pay and pension across all levels of pay matrices and doing away with 52 allowances and merging 36 of them.

The recommendation of the commission to raise the ceiling of House Building Advance (HBA) to Rs25 lakh from Rs 7.50 lakh has also been given a nod by the Cabinet. However, all interest-free loans have been abolished except for those taken for medical treatment, travel allowance (TA) on tour or transfer, TA for family of deceased employees and leave travel and conveyance (LTC).

The pay commission’s recommendation to reduce as many as 196 kinds of allowances has been kept in abeyance. The Cabinet decided to constitute a committee headed by the finance secretary for further rationalisation of allowances and asked for its report within four months. Until then, the current allowances will continue.

The Cabinet also rejected the pay commission's recommendation for deduction of Rs 1,500 to Rs 5,000 per month for the group insurance and asked the finance secretary to explore a low cost insurance for the employees.

The commission has also estimated an additional burden of Rs 12,133 crore due to arrears of pay and pension for last two months of 2015-16, which the Finance Minister Arun Jaitley said would be paid in the current fiscal. He, however, did not specify whether the arrears would be disbursed in lump-sum or in installments.

These pay hikes of the government employees, which will put additional cash in their hands, are expected to boost private consumption demand in the market even as it is likely to stretch government finances.

At a press conference after the Cabinet decision was announced, Jaitley said that the government had already provisioned for the incremental expenditure on account of it. “I have already provided for it (pay hike, pension and allowance costs) in this year's budget estimate. Therefore, this amount doesn't come to us as a surprise,” he said.

According to him, the consumption demand generated from the flush of money in the economy was “one of the important need of the economy” at a time when demand in global markets was sluggish.

“This will have two obvious consequences. There'll be more money in the market to spend. Therefore, its impact will be on more than one front. It has the ability to generate more demand. Today, one of the important need of the economy is that demand must be generated. The second is it can also lead to additional savings, which is also important for the economy,” he told the reporters.

Jaitley pointed out that the previous governments took 19 months to decide on the Fifth Pay Commission's recommendations and 32 months in case of the Sixth Pay Commission, while the present government finalised the decisions on the Seventh Pay Commission in seven months.

As against the increased annual burden of Rs 17,000 crore on the exchequer from the Fifth Pay Commission, and Rs 40,000 crore from the Sixth Pay Commission, implementation of the Seventh Pay Commission will cost Rs 72,800 crore, and this may change because the decision on allowances has been deferred for the secretary-level committee to reconsider the pay commission's recommendations, the Finance Minister said.

Jaitley accepted that rise in the money supply in the economy could fuel inflation, which is already above the comfort level of 5%.

Dr DK Srivastava, chief economic advisor, EY India, however does not see the government staff pay hike scorching inflation because of its timing. “It (seventh pay commission) has been accepted now but its actual implementation will take a little more time. It is quite possible by that time the positive effects of the monsoon would have come and the growth in prices would be arrested, particularly food prices,” he argued.

Dr. Srivastava expects the rise in disposable income of Central government employees to revive sluggish demand, which could expand GDP growth marginally. According to him, national income growth would be further charged by revision of salaries and pensions by the state governments.

“The GDP growth should be supported because we are looking at consumption-led growth. Even prior to this happening, we have been saying this will have a positive impact on private demand and that will be beneficial particularly because the government demand is constraint,” he said.

He expects a feedback effect of higher expenditure on government’s revenues as personal income tax improves.

Dr. Soumya Kanti Ghosh, chief economic adviser, economic research department, State Bank of India (SBI), said there was little clarity on how the government will bear the additional burden of the expenditure due to the pay revisions.

“The recommendations are estimated to put an additional burden of Rs 1.02 lakh crore (Union Budget: Rs 92,050 crore and Railway Budget: Rs 10,050 crore), or nearly 0.7% of the GDP on government’s exchequer, although the provisions made by Union Budget 2016-17 are at Rs 53,844 crore. It thus seems that the additional Rs 38,200 crore is likely to be spread over next year or so, though there is no clarity on that,” he said in a statement issued by SBI.

Dr Ghosh expected its impact to be felt in the fiscal 2018. Like Dr Srivastava, he too is not very worried about the inflationary impact.

“We believe impact on inflation could be temporary. Past data suggests that inflation tends to rise following pay commission recommendations and then declines. However, given the significant underutilisation of capacity, we believe the impact on inflation may not be that significant,” he said.

Meanwhile, the Confederation of Central Government Employees rejected the commission’s recommendations and said they were “not acceptable” and have reportedly threatened an indefinite strike to press their demand for revising the hike.

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