OPINION

An expected raise

The Seventh Pay Commission’s recommendations represent quite a bonanza for government employees, both current and retired. The 23.55 per cent increase in pay, allowances and pension that is recommended may be lower than the 40 per cent increase that the Sixth Pay Commission brought, but this difference is accounted for by the fact that India currently has a weaker economic and financial situation. This Pay Commission recommends an increase of 16 per cent in basic pay, 63 per cent in allowances and 24 per cent in pension. Involving 47 lakh employees and 52 lakh pensioners as it does, this expenditure scale would in ordinary circumstances have been quite a drag on the economy. As it is, the recommendations increase expenditure by 0.65 per cent of GDP. Besides, the impact of the salary raises on the States’ fiscal resources — considering that States have also in the past tended to implement the recommendations — cannot be underestimated. Luckily, commodity prices are low and this relieves some of the pressure on government finances. The Finance Ministry is of the opinion that a higher GDP growth rate next year will help fund the extra expenditure of Rs.1.02 lakh crore. The assumption is that higher incomes will lead to higher spending by employees on consumer goods, which, in turn, will spur the manufacturing sector out of its stupor. But the flip side to this is higher inflation and the possible negation of all that the Reserve Bank of India has been doing this past year. The implementation of recommendations by successive Pay Commissions has been followed by a jump in retail inflation, which can be assumed to occur again.

That said, there remain some non-macroeconomic issues. The most important seems to be the proposed pay matrix, which seeks to replace the existing pay bands and pay scale structure. The Commission recommends a ‘fitment factor’ — employees’ pay multiplication — of 2.57 in the matrix. However, unless the calculation behind the migration from the old structure to the new one is done carefully, the existing discrepancies will remain, just 2.57 times larger in scale. The other big change was rationalising the pension payments for past pensioners and current retirees, based simply on the number of years of service and number of increments received. This seems fair, but again the equitable nature of the concept depends on the pay matrix calculations. Overall, with inflation having hit double digits for a few years following the implementation of the Sixth Pay Commission report, an increase of this magnitude was expected. It is to be hoped that all the rest — especially the boost to consumer demand — also goes according to plan.