The Cabinet’s decision to > raise salaries and pensions for more than one crore government employees and pensioners by implementing the Seventh Pay Commission’s recommendations will impart a fillip to consumption demand and economic growth. With recent data from the Centre as well as the Reserve Bank of India showing that > robust private consumption is > a key driver of current economic momentum , additional money in the hands of the government staff and retired personnel is bound to fuel a healthy demand for a variety of goods and services. As expected, the announcement of the pay increases has been welcomed by industry groups, from automobile manufacturers to consumer durables sellers. And with the additional payout from the government toward the enhanced pay, allowances and pensions projected to exceed Rs.1.14 lakh crore over the course of the current fiscal year ending in March 2017, the multiplier effect is bound to be significant. Inevitably, the Centre’s decision will put upward pressure on salaries in State governments as well as the private sector. Separately, the decision to more than triple the ceiling for house building advance to Rs.25 lakh from Rs.7.5 lakh is likely to provide a much-needed incentive for more government and defence personnel to invest in housing, and thereby boost employment. Combined with indications of a normal monsoon and the marginal impact of the fallout from Brexit so far, the portents for the economy are indeed positive. Besides the anticipated increases in spending, the higher pay and pensions are also expected to bolster savings, which could help the banking and financial system channel funds to meet investment demand.
There are, however, some risks from the increased salary and pension outgo. In its June monetary policy statement, the RBI had flagged the upside risks to the inflation outlook posed by several factors including the implementation of the Seventh Pay Commission’s recommendations. There is some relief on the price pressure front with the Cabinet keeping the decision on raising allowances on hold while a committee headed by the Finance Secretary examines the implications of accepting the pay panel’s prescriptions. A higher house rent allowance would have immediately stoked retail inflation, which is already at a 21-month high. The other concern relates to the impact on government finances, particularly the effort at fiscal consolidation. Finance Minister Arun Jaitley is confident that the > budget deficit will be contained within the > 3.5 per cent of GDP target this financial year, but how this will be achieved is not yet clear.