Pay Commission: The Plus And Minus Of It

Pay, allowances and pensions of central government employees (4.7 million) and pensioners (5.2 million) could go up by an average of 23.55 per cent from January 2016 onwards. “While this is lower than the 40 per cent hike implemented after the 6th Pay Commission (effective January 2006), it is comparatively higher than the 16 per cent increase assumed in the medium-term expenditure framework statement of the finance ministry”, says Samiran Chakraborty, economist at Citigroup.

According to the 14th Finance Commission, the Centre’s salary and pension bill at about 1.5 per cent of GDP. If the 7th Pay Commission’s recommendations are implemented as they are, this would go up to 2.2 per cent of the GDP. That’s because the new “basic salary” increase is adjusted for indexation merger to work out the actual pay hike.

Take the case of a government employee with a current basic pay of Rs 100. The 7th Pay Commission assumes that the employee will be entitled to a dearness pay of, say, 125 per cent of the basic (Rs 125) at the time of implementation of the new pay. “It`merges’ this dearness pay with the old basic pay (that is Rs 100 + Rs 125 = gross of Rs 225) to arrive at the new basic pay of Rs 267 (for employees in a certain pay band) that includes an actual raise of 18.7 per cent. Averaging across all pay bands the salary increase is estimated at 16 per cent”, points out Indranil Sen Gupta (India Economist) at Bank of America-Merrill Lynch.

Pay Commissions reset state-run pay every 10 years. It begins with the central government, followed by state governments and universities. Salaries at state-run undertaking are linked to government pay, but sometimes follow a five-year wage cycle. The 6th Pay Commission had recommended that revisions be effected every five years but that does not seem to have been followed this time. The 7th Pay Commission has recommended revision of salaries effective January 1, 2016, a decade after the last rounds of 1st January 2006 and 1st January 1996.

Care Ratings estimates the monetary impact on the central government at around Rs 1.02 lakh crore, of which Rs 73,650 crore would be on the Union Budget; Rs 28,450 crore on the Railway Budget. The total impact of the panel’s recommendation would be an increase of expenditure by 0.65 per cent of GDP in fiscal 2017.

Fiscal Under Pressure, But There’s Cheer
Explains Madan Sabnavis, chief economist at Care Ratings: “If we assume that the fiscal deficit only increases by the amount of Pay Commission recommendation in FY17, then the fiscal deficit amount stands at Rs 6,29,299 crore which is 4 per cent of GDP. The government in its previous budget has targeted fiscal deficit of 3.5 per cent for fiscal 2017”. In effect, to attain the 3.5 per cent deficit ratio, approximately Rs 80,000 crore additional revenue needs to be generated. “Alternatively there have to be some cuts in expenditure to ensure that there are savings which can compensate for this additional cost on salary account”, he adds.

It can a salutary effect on consumption. As state governments also tend to implement the central pay commission recommendations -- albeit with some modifications and a lag -- the combined wage stimulus (centre plus states) could be in excess of one per cent GDP over fiscals 2017 and 2018. The sentiment boost for over 15 million workers and pensioners (of the Centre and states) could lift private consumption growth to 8.4 per cent on a year-on-year (YoY) basis in fiscal 2017 (from 6.3 per cent YoY currently). “The key to note that unlike the last pay commission, there wouldn’t be significant arrears receivable this time”, says Chakraborty.

Set aside the point on arrears for now; you can’t help think: if only GST had been cleared.

That’s another story though!