The 7th pay commission hike has been announced by the Central government for its nearly 48 lakh central government employees and 55 lakh pensioners. In a nutshell, Pay will go up by 16%; increase in allowances will be 63%; increase in pension will be 24%.
Recommendations will come into force from January 1, 2016. Minimum basic pay for central govt. staff recommended at Rs. 18,000; maximum pay Rs. 2.25 lakh per month: Pay Commission. Pay Commission recommends 3% annual increment and 24% hike in pension for central government staffers.
The impact of the announcement will be around Rs.1.02 lakh crores for the implementation of the pay commission, including Rs.28,000 crores on the railway budget. The FM has announced that it will not increase the fiscal deficit beyond 0.65%, but the move is bound to have an impact on the exchequer. Murmurs are heard in the armed forces, which lament of the continued disparity between the salaries of the civilian and armed forces.
What is it for the Indian economy? The move will grow demand for consumer durables, auto-sector and real estate. ( I would though prefer improvement of public mass transport, rather than everyone owning a car.) The tax net would be widened with more people paying taxes and the government retrieving nearly 20% of the payouts. An estimated 30% can go into financial savings and the rest into goods and services. The retarded growth of bank savings, less than 10% for 2016, may see an upswing. For any economy, more circulation of money is always healthy and is welcome.
Any such steep increase could fuel inflation, but the sum in actual circulation, after the taxes taken by the government being half of the total pay out, and a further 25-30% locked in financial instruments, actual spending may be well within bearable limits, so as not to result in a spiraling higher inflation.
What the government should remember is nearly 450 million people are engaged in the unorganized and private sector, for whom there are hardly any provision for pension and who slog out more. The pay hike in the government sector is without a corresponding quality and volume of output. We tend to hate all that is to do with government, save a cushy job.
States too manage to keep pace with Central pay revisions, for their employees, notwithstanding the fact that it puts undue pressure on their meager finances. The 7th pay commission revisions are certainly a serious problem for the financially distressed states like West Bengal, Tamil Nadu, Uttar Pradesh, Punjab and Orissa.
Government must reduce its own expenses, control its own labour strength, outsource from more competent private sector and above all try and reduce the disparity of the income between private and government sector.