Seventh Pay Commission: Implications for Economy

The 7^th Central Pay Commission was under the chairmanship of A K Mathur has recommended the following:

• Minimum and Maximum Pay: the commission has fixed the pay based on the Aykroyd formula. The minimum pay has been fixed at Rs. 18,000 per month. Maximum pay has been fixed Rs. 2,25,000 per month for Cabinet Secretary and others presently at the same pay level.
• New Pay Structure: A new pay matrix has been designed and the present system of pay bands and grade pay has been dispensed. The grade pay has been subsumed in the pay matrix. The status of the employee will be determined by the level in the matrix instead of the grade pay.
• Fitment: A fitment factor of 2.57 to be applied for all employees.
• Annual Increment: The rate of annual increment has been retained at 3 %.
• Cadre Review: Systemic change has been recommended by the commission in the process of Cadre Review for Group A officers.
• Allowances: Abolishment of 52 allowances has been recommended. Another 36 allowances has been subsumed in an existing or newly proposed allowances. Also, an increase of 23.55% in pay and allowances has been recommended.
• Advances: All non-interest bearing Advances have been abolished and among the interest bearing advances only Personal Computer Advance and House Building Advance (HBA) has been retained.
• Medical Facilities: For Central Government employees and pensioners, introduction of a Health Insurance Scheme has been recommended by the commission.
• Ex-gratia Lump sum Compensation to Next of Kin: The Commission has recommended for the revision of ex-gratia lump sum compensation to next to kin in case of death arising during performance of duties for defence personnel and civilians including CAPF personnel.
• Martyr status for CAPF personnel: The commission has recommended to accord martyr status to the CAPF personnel in case of death in the line of duty at par with defence forces personnel.
• New Pension System: The commission has recommended for setting up of strong grievance redressal mechanism to hear grievances relating to NPS.
• Short service commission: Short service commissioned officers will be permitted to exit the armed forces at any time between 7 to 10 years of service.
• One rank one pension (OROP): The commission has proposed OROP for civilian government employees in line with OROP for armed forces.
• Pensions: 24% hike in pensions.
• Beneficiaries: Seventh pay commission will benefit 47 lakh central government employees and 52 lakh pensioners. In addition, employees of autonomous bodies, universities and public sector units will also be benefitted.
• Implementation: The commission had recommended the implementation from January 1, 2016.

Implications for Economy

On Fiscal health

There will be a slight increase in the fiscal deficit due to increased salary and pension payments. The pay hike will increase the budgetary burden to the tune of Rs 1,02,100 crore this year and Rs 72,800 crore next year. There would be an increase of 0.65% of expenditure on salaries to GDP compared to 0.77% in the 6^th pay commission.

Increase in consumption and aggregate demand

There will be an increase in the aggregate demand in the economy. Increase of disposable income within the salaried class will trigger consumption. There will be more demand for cars, houses and consumer durables among others. This will make banks to lend more as the creditworthiness of salaried people is high. Also, the increase in demand will propel industrial growth.

Increase in savings

With more income in hand, people will increase their savings. The increase in savings will be used for the development of the country. Most people will also tend to save more to utilize the opportunities of tax exemption.

Increase in Inflation

With rise in demand for goods and services, there will be a rise in inflation in the short term.

Increase in tax revenues

Government will also indirectly benefit as the tax revenues will increase. Presently, tax exemption limit is Rs 2.5 lakh. Also, when people spend there will be taxation.

Impact on State governments

The finances at the state government will get impacted as it has to provide for additional pay hikes to the employees. States with higher fiscal deficits have to generate additional revenues in order to maintain their fiscal deficits.

Conclusion

Though, the pay hike is a burden on the government’s coffers, it will act as a stimulus to the economy by increasing the savings, consumption, industrial sector growth, tax revenues, bank credit and more.