The Union government has announced implementation of the Seventh Pay Commission recommendations. The commission recommended a 23.55 per cent increase in overall emoluments for employees. Finance Minister Arun Jaitley has congratulated central government officers, employees and pensioners on “a historic rise in their salary & allowances through the 7th CPC.” Yet, the hike — at around 14 per cent — is the lowest in 70 years.
That the latest pay hikes are much lower than those in the past is welcome. It limits the inflationary impact of the pay revisions. The sixth pay commission, for instance, had recommended a 20 per cent hike, which was doubled by the time it was implemented and eventually amounted to about 54 per cent. Not surprisingly, it was followed by a period of higher expenditure and higher inflation. The government, this time, should be commended for not falling prey to such populism especially at a time when the consumer price inflation remains high. As a result, the increased payout is expected to bump up overall growth, by placing more money in the hands of the consumers, but will also have a relatively mild impact on the overall inflation. However, the total additional outgo of over Rs 1 lakh crore, around 0.7 per cent of the GDP, will have an impact on the fiscal deficit for the current financial year. That’s because, as the FM announced, the hike in emoluments will be effective from January 2016 and all arrears will be paid out in the current year itself. The only way for the FM to hold on to his promise of meeting fiscal deficit targets is to compromise on the capital expenditure. The government faces a tough choice: It cannot afford to increase salaries and pensions, which are part of the revenue expenditure, without either reducing the capital expenditure, which is important to promote growth, or taking a hit on the fiscal deficit.
Yet, given the fact that pay commission revisions, which affect 1 crore government employees, happen once in a period of 10 years, it was politically unviable for any government to provide a lower rate of increase. In fact, as the FM noted, the latest recommendations made in November 2015 are being implemented more quickly than in the past. For instance, there was a delay of 19 months and 32 months respectively in the implementation of the fifth and sixth pay commissions. Lastly, concerns about the affordability of such pay hikes, especially during a period of economic stress, cannot be divorced from the long-ignored need for a more efficient and accountable workforce.