Seventh Pay Commission gives 23.55% salary hike to central government employees; experts say it will boost private consumption but bring down government capital expenditure
In a post-Diwali bonanza for central government employees, the Seventh Pay Commission on Thursday has recommended a 23.55% hike in their salaries, including allowances and pensions.
The pay panel, headed by Justice A K Mathur, in its report submitted to the finance ministry has suggested an increase of 16% in basic salary, 63% in allowances and 24% in pension. The new pay scale will come into effect from January 1, 2016.
The salary commission has set the minimum salary at Rs18,000 per month and pegged the maximum pay at Rs 2.25 lakh per month for apex scale and Rs 2.5 lakh per month for cabinet secretary. It has maintained the rate of annual increment at 3% and doubled the gratuity doubled to Rs20 lakh from Rs 10 lakh.
The recommendations put out by the pay commission will impact 47 lakh central government employees and around 54 lakh pensioners and is expected to boost consumption demand as it will improve their spending power.
Mathur, who addressed the media at the finance minister Arun Jaitley's residence, said the financial impact of the pay hike in fiscal 2017 would be Rs 1.02 lakh crore, of which increase in salary would be Rs 39,100 crore, allowances Rs 29,300 crore and pension Rs 33,700 crore.
The FM estimated the additional cost to the exchequer in the first year for the implementation of commission's recommendation to be Rs 70,000 crore.
D K Srivastava, chief economist at EY, said the impact of the pay commission's recommendation on fiscal deficit due to increased outgo on the salaries of the government employees would not be much in the current fiscal as only three months were left.
He expects its fallout to take effect in the next few years. Srivastava said the positive impact due to rise in disposable income of consumer could get negated by a fall in government's capital expenditure as it current expenditure is likely to shoot up on account jump in government staff salaries.
"We will see an increase in disposable income of consumers that will push up demand and absorb the excess supply in the system. However, the net effect would be lower than direct effect as the government's capital spend comes down as its current expenditure will expand because of higher salary outgo on government employees," he said.
The EY economist said the government was, as it is, not spending much on infrastructure and that was likely to go further down post the pay commission's report.
According to him, spike in private consumption due to higher in dispensable income would improve GDP growth marginal by 0.1-0.2%
Interestingly, seventh pay commission's hike is lower than the 35% salary increase recommended by the Sixth Pay Commission in 2006.
Srivastava said the two were not comparable: "In the last pay hike (in 2006), there were many structural changes. This time, it is incremental. They should not be compared," he said.
Jaitley said of the Rs 1.02 lakh crore financial impact, Rs 74,000 crore would be on Union Budget and Rs 28,000 crore on Railway Budget.
To hasten the implementation of the recommendation, the government has decided to set up an implementation secretariat that would be headed by the expenditure secretary. The ministry will also create a separate empowered committee under the cabinet secretary that will look at suggestions from stakeholders.
The commission has abolished 52 allowances and subsumed 36 of them. It has done away with the current system of pay bands and grade pay and come up with a new pay matrix.
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