The BJP-led NDA government on Wednesday announced an overall increase of 23.5% for over one crore government employees and pensioners in line with the Seventh Pay Commission’s recommendations, which left most services dissatisfied. The hikes will come with the August paychecks and be paid with effect from January 1, 2016.
The arrears for the six months will be disbursed during the current financial year (2016-17) itself. The government broadly accepted the recommendations of the Seventh Central Pay Commission, doling out big salary and pension increases to employees and retirees. Demand is set to get a big boost but that may fuel inflationary pressures and fiscal discipline could be threatened. The approved maximum pay, drawn by the Cabinet Secretary, is Rs. 2.5 lakh per month (against the current Rs. 90,000), higher than the salaries drawn by MPs.
In November 2015, within the overall hike of 23.55%, the pay panel had recommended increases of 16% in pay and 24% in pensions. The starting salary for new recruits at the lowest level has been raised to Rs. 18,000 from Rs. 7000 per month. Freshly recruited Class I officers will receive Rs. 56,100. This reflects a compression ratio of 1:3.12 signifying that the pay of a Class I officer on direct recruitment will be three times the pay of an entrant at the lowest level.
To examine the concerns employees have raised, the Union Cabinet decided to set up four committees. The first will look into the implementation issues anticipated and the second one will go into the likely anomalies. Another one will further examine the recommendations on allowances, which have largely been kept on hold. The fourth will suggest measures for streamlining the National Pension System.
The gratuity ceiling stands enhanced from Rs. 10 lakh to 20 lakh. The ceiling on gratuity will increase by 25% whenever dearness allowance rises by 50%. The Cabinet also approved the recommendation of the commission to enhance the ceiling of house building advance from Rs. 7.5 lakh to Rs. 25 lakh. All but four interest-free advances have been abolished.
“The fifth and sixth pay commissions had narrowed the gap between salaries paid in the private and government sectors. The seventh has moved further in the same direction. An IIM-Ahmedabad study has found that pay in the government sector is distinctly greater than that in the private sector so there cannot be protests from employees,” said Union Finance Minister Arun Jaitley.
The hike in salaries and pensions of 4.8 million central government employees and 5.5 million pensioners can potentially set off a cycle of spending and investment, with people expected to use higher wages to buy cars and houses. The government, which will approve higher salaries based on the seventh pay commission recommendations on Wednesday, would be hoping that the hike will prompt people to spend more and aid the broader economy revival.
Industrial output has been inconsistent in recent months. Factory output contracted again in April after a gap of two months. Industrial growth, the closest approximation of production activity of thousands of factories, shrank 0.8% in April compared with a 0.3% growth in the previous month, pulled down by a muted manufacturing and consumer non-durables sector.
According to broking and research firm Nomura, since pay hikes boost government employees’ disposable income, they have historically pushed up consumer demand. “A category-wise breakdown of consumption shows discretionary spending on automobiles, clothing and footwear and expenditure on education have historically risen in the years following previous pay commissions,” Nomura said in a research note in November, prepared ahead of the pay commission’s report to the government.
But the Centre is confident of containing the fiscal deficit, a measure of how much the government borrows to fund its expenses within the budgeted 3.5% of gross domestic product (GDP). Keeping the fiscal deficit within budgeted limits is crucial to keeping interest rates under check. Higher government borrowing can potentially affect the funds available for banks to lend to companies and individuals. This, in turn, can prompt banks to raise interest rates.
Analysts are watching how the government manages its public finances in the wake of off-budget expenses such as those relating to one-rank-one-pension (OROP) scheme for defence personnel and expected pay commission payouts. “We believe impact on inflation could be temporary. Past data suggests inflation tends to rise following pay commission recommendations and then declines,” said Soumya Kanti Ghosh, the chief economic adviser, State Bank of India.
The hike in salaries and pensions of 4.8 million central government employees and 5.5 million pensioners can potentially set off a cycle of spending and investment, with people expected to use higher wages to buy cars and houses. The government, which approved higher salaries based on the 7th pay commission recommendations on Wednesday, would be hoping that the hike will prompt people to spend more and aid the broader economy revival.
“Certainly the seventh pay commission implementation will have a positive impact; we expect people will upgrade their consumer durables post increase in disposable income. This will have an impact in both urban and rural sales,” said Niladri Datta, the corporate marketing head, LG India.
According to analysts, since pay hikes boost government employees’ disposable income, they have historically pushed up consumer demand. “The pay commission recommendations will boost consumption to the economy by 0.30% of GDP and increase savings by 0.20% of GDP,” said Devendra Pant, the chief economist, India Ratings and Research, a ratings firm. Others also echoed similar views.
“We strongly believe that consumer spending will be on the rise. Consumer durables such as air-conditioners, refrigerators considered as luxuries in the past, have nowadays become items of necessity. Moreover, with the rise in disposable income and scaling of e-commerce, the consumer durable industry is expected to grow by 15% in this fiscal,” said Ajay Seth, the head of sales and service, Panasonic India.
It entitled government employees and pensioners to arrears of about Rs. 27,000 crore, a part of which was spent on buying cars and houses. Passenger vehicle sales went up nearly 20% in 2008-09 and nearly 22% the next year. Normally states follow the Centre’s lead in revising salaries and that, too, will have an impact on the economy. “The addition to income can be expected to have a multiplier effect on urban demand in India. Such a boost to consumer sentiment should be welcome,” said Richa Gupta, the senior economist, Deloitte, an audit and consulting firm.