Pay Commission Payouts: Reading The Fine Line

The Diwali gift for government employees has just arrived. The 7th Pay Commission report has been submitted to the government and as usual employees are awaiting its acceptance. For a government employee, pay structure and even pay revisions depends largely on the Pay Commission which the government sets up every ten years. The annual increments at 3 per cent anyhow happens each year.

The pay commission’s financial implication is huge and not only on the country’s exchequer but also on employee’s wallet and thereby on corporate earnings. The package kicks in from 1st January, 2016 and the total financial impact in 2016-17 itself is likely to be Rs 1, 02,100 crore.

Here’s the break-up: There are three heads of income which will witness the increase- Pay, allowance and pension. The increase in pay would be Rs 39,100 crore (16 per cent increase), increase in allowances would be Rs 29,300 crore (63 per cent increase) and increase in pension would be Rs 33,700 crore (24 per cent increase), thus settling down to an overall increase of 23.55 per cent. Interesting, the expenditure on account of HRA is likely to go up from Rs 12,400 crore to Rs 29,600 crore, an increase of Rs 17, 200 (138.71 per cent).

There will be an enhancement in the ceiling of gratuity (tax-free for government employees) from the existing Rs 10 lakh to Rs 20 lakh. The superannuation has been recommended to be fixed at 60 years uniformly.

Financial impact: The minimum pay in government is recommended to be set at Rs 18,000 per month while the maximum has been capped at Rs 2, 25,000 per month for those in highest scale and Rs 2,50,000 per month for Cabinet Secretary and others presently at the same pay level. There are nearly 47 lakh central government employees and about 52 lakh pensioners in the country.

Understandably, with more disposal income in hand, consumption should pick up. The total impact of the 7th Pay Commission’s recommendations is expected to increase GDP by 0.65 per cent. This however is lower than what the 0.77 per cent impact of the 6th pay commission.

End note: Out of the total financial impact of Rs 1, 02,100 crore, Rs 73,650 crore will be borne by the General Budget and Rs 28,450 crore by the Railway Budget. This puts a pressure on the country’s fiscal situation. The target set for fiscal deficit in 2015-16 is 3.9 per cent of GDP while in 2016-17 it’s at 3.9 per cent. It remains to be seen how much impact pay commission will have on consumption pattern in the country. Else, the direct and indirect tax collections will have to be equally robust.