With the union cabinet having accorded its approval to the recommendations of the 7th Pay Commission, about one crore government employees and pensioners will get a 2.5-time hike in basic pay and pensions, which will cost the state exchequer annually Rs 1.02 lakh crore. The once-in-a-decade pay hike has seen burden on exchequer rise from Rs 17,000 crore in the 5th Pay Commission to Rs 40,000 crore in the 6th and Rs 1,02,100 crore in the 7th Pay Commission.

According to some experts, there would be a recurring burden of Rs 72,800 crore every year, while the current fiscal's burden would be Rs 84,933 crore in view of the fact that they would be implemented from January 1, 2016. The recommendations cover 47 lakh central government employees and 53 lakh pensioners. This includes 14 lakh serving employees and 18 lakh pensioners in defence forces.

Bonanza for Govt. Staff

The new scales of pay provide for entry-level basic pay going up from Rs 7,000 per month to Rs 18,000, while at the highest level, i.e., secretary, it would go up from Rs 90,000 to Rs 2.5 lakh. For Class 1 officers, the starting salary will be Rs 56,100.

As per media reports, the Confederation of Central Government Employees (CCGE) has stated that recommendations of the 7th Central Pay Commission are “not acceptable” in view of the prevailing economic conditions, and has threatened to go on an indefinite strike from July 11 to press their demand for revising the hike.

The government claims that since there will be more money in the market to spend, it will generate more demand that will help push economic growth. Also additional savings will help economy, but on the flip side more money supply will lead to inflationary pressure. The government is counting on the higher salaries to result in more consumer spending which could trigger economic growth. However, some experts believe that the additional cash in the market could fuel inflation. To keep a check on price rise driven by greater liquidity in the market, the government plans to keep a close eye on the market.

As the government has cleared the pay commission recommendations to increase compensation for government employees, there are concerns about how the huge cash outgo on account of the hike is going to impact the fiscal situation of the economy. However, a section of experts are of the view that despite such concerns, on a net basis the pay hike will indeed be a huge boost to consumption demand and in turn contribute to GDP growth.

This section of experts cites the example of the impact of 6th Pay Commission in 2008-09. According to one expert, the implementation of the 6th Pay Commission hike recommendation had boosted two-wheeler and car sales and increased demand in the cement sector. “The arrears resulted in robust demand for consumer discretionary products that resulted in sustained stock performance over three-five years,” noted Jai Shankar, chief India economist of Religare.

Impact on Economy

With regard to the impact of the implementation of recommendations of the 7th Pay Commission, one expert of a renowned rating agency sees a Rs 45,110 crore consumption boost (0.30% of GDP) to the economy and Rs 30,710 crore (0.20% of GDP) savings increase. He believes after the sharing of central taxes with the state governments, the central government’s net tax revenue will increase by Rs 14,100 crore (0.09% of GDP) in FY17 and the gross impact is likely to be Rs 94,775 crore (0.63% of GDP).

India’s corporate sector hopes that hike in salaries of the government employees will have a positive impact in terms of boosting demand and push economic growth. It believes that the decision would be a great mood elevator for the middle class which would rev up consumer sentiment and in the process provide a big boost to the economy and industry. Hoping that the government would stick to its fiscal deficit targets for the year in spite of this hike, business circles apprehensively ask: “The bigger question... as in how is this going to be financed... if you have a pay increase that is ahead of productivity growth, then it will end up being inflationary for the economy.”

The industry sector is sanguine about the pay hike of government employees giving a strong boost to the consumer demand and help uplift the growth of the economy. It believes that this combined with continued public push to the capital expenditure will help steer the economy to higher growth levels of 8 percent and above, which is much needed amidst the current global headwinds. While asserting that extra money in the hands of a large number of salaried earning people would lead to higher consumption and demand – driven economic growth, industry sector cautions that the impact of pay hike on overall fiscal situation of the government should not be allowed to deteriorate.

Plight of Unorganized Workforce

Undoubtedly, hike in the salaries of the government staff is a welcome move; nevertheless, there is no such commission for the bulk of labour force that is engaged in the unorganized sector, which is in a miserable plight. Government employees constitute a small fraction of the total workforce. India adds around 7.2 million members to its workforce every year, and the total work force will rise to 485.6 million by 2016-17 and to 495.1 million by 2019-20.

The manufacturing, construction and services including transport, communication, hotels, education and real estate are the major creators of non-agricultural employment.

Low productivity in agriculture sector has reportedly led about 37 million workers to leave this sector for the sustenance of this transition, there is need to create enough employment in the non-agriculture sectors.

Some legal experts lament that the unorganized sector, which comprises more than 90 percent of the total workforce in the country, is deprived of the benefits of various schemes started for their welfare due to poor implementation by the respective government authorities. They cite the example of Punjab where Rs 750 crore was collected for welfare of labour but little has been spent and there was zero percent spending in 2008-13.

Future Prospects

Regrettably, India has a Human Development Index of 0.162% and ranks 134th of 180 countries where one-third of the total population lives below the poverty line. There is dire need to give due recognition to the workers engaged in unorganised labour such as housemaids, newspaper vendors, fruit and vegetable sellers and rag pickers so as to protect their social, economic and legal rights. Besides, some regulatory framework is also called for to look after their wages and welfare. Irony of every pay commission has been that top bureaucrats typically get paid much less compared to those holding top positions in the private sector while the legion of peons, drivers, secretarial staff and teachers get paid three-four times their private sector counterparts, and with little pressure on performance, deliver very little.

 One critic has noted that little has been done by any pay commission of present or past to address the real issue of too many clerks in the government and too few officers which is the primary reason for service quality being so poor despite India’s large bureaucracy. Besides, since pay commissions are really about balancing the maximum demands of the bureaucracy with the minimum needed to keep it from revolting, the issue of fixing the head-to-tail ratio and implementing performance-linked-pay can be expected to be mentioned by the Nth pay commission. Some observers have noted that the union government’s acceptance of the recommendations of the 7th Pay Commission is perhaps designed to take political advantage out of it in the ensuing state assembly elections thereby having political stakes or Satte Pe Satta.

Dr Singh is executive editor, News 24