Age Debate: The huge hike proposed by the 7th Central Pay Commission will harm the economy

The total financial impact of the huge hike in salaries, part of the recommendations of the Seventh Pay Commission, is likely to be around Rs 1,02,100 crore on the exchequer.

In this context, with the economy growing at a rate of about six per cent, the government might find it challenging to meet both higher wage payouts and fiscal consolidation in 2016-2017.

It is possible that the government may have to defer its fiscal consolidation roadmap of restricting fiscal deficit to three per cent of gross domestic product by a year, i.e. from 2017-2018 to a year later.

Another worry is that capital expenditure by the government could get adversely affected at a time when public investment is an imperative for boosting economic growth.

This is an important concern as public investment has not picked up and it will take some time till some buoyancy is witnessed in investments.

The money paid out (in terms of increased salaries) will incur income tax and some of it will be saved. Consequently, the additional impetus to consumer expenditure from this additional flow of money into the economy is not likely to be as substantial as it is being thought to be.

Overall, the consumer confidence may get a boost but it will take around three to four quarters (at least a year) to make any kind of impact on the economy. Also, the impact will mainly be visible through consumer spending, which will grow gradually.

The rather moderate increase in monthly household incomes of government employees should impact consumer non-durables more positively than consumer durables such as cars and other big-ticket items. Also, when people spend, the indirect tax collections improve. But as recommendations take time to be accepted by the government, any positive impact on the economy will not be immediate and will only be visible after some time.

Having stated the above facts, if real GDP growth picks up, I don’t see the Seventh Pay Commission recommendations as fiscally profligate, as rising GDP and consumer spending will enhance government revenues.

In the long run though, I don’t think the impact on the economy will be seriously inflationary, as demand is likely to be mostly for consumer non-durables, where there is excess capacity. Further, the inflationary effect is likely to be transitory. Marked fall in global commodity prices could offset any inflationary pressures.

But at the same time, the fall in global commodity prices is also something which cannot be predicted. However, any such fall will definitely help arrest inflationary trends, quite like the global crude prices which have been falling for the past one year.

If other commodity prices also show sharp fall across the globe, like crude prices, they will have a far greater impact on inflation growth in the country.

Overall, however, the impact of the Pay Commission recommendations on the economy will be medium-term as consumer confidence takes time to improve and the grassroot level percolation (of the decision) will also be a lengthy procedure.

Sher Mehta, CEO and chief economist of Macroeconomics School (London and New Delhi)

$ Fiscal roadmap will go awry

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The Seventh Pay Commission has recommended 14.27 per cent hike in basic pay (with allowances the hike is 23.55 per cent). Since this hike is likely to have an impact of over Rs 1 lakh crore on the public exchequer, it is germane to have a discussion over it. Ideally, the salary of a public servant should be such that it attracts good talent and remains affordable for the state.

To attract good talent from the market, salaries and allowances offered by the government should be competitive with the market.

In developed countries, the gap between salaries in the public sector and private sector is narrow. In fact, in countries like Singapore, the salary in the public sector is higher than in the private sector.

This is one of the reasons for high quality public amenities offered by these countries. In sub-Saharan African countries which are poor in delivery of public services and high on corruption, salaries in the public sector are much lower than those in the private sector.

Despite the implementation of Sixth Pay Commission recommendations, which are considered liberal, in India the median salary in the Central government has been almost half of that offered by the private sector. The rate of hike in salaries in the private sector in India is among the highest in the Asia Pacific region including China, the Philippines, etc. Also, in many countries in Asia Pacific, hikes in salaries of public servants are quite liberal. This year China announced a 60 per cent hike in the base salaries of 39 million employees as a part of pension plan overhaul.

The public sector brings with it unaccounted benefits such as prestige and job security. But these cannot compensate for low salary and petty allowances. For example, even a Cabinet secretary to the Government of India is entitled to only Rs 150 per visit to a private doctor under the Central Government Health Service system. The hike recommended by the Seventh Pay Commission will result in a salary to GDP ratio of 0.65. The ratio of 0.65 over a period of time is likely to come down further. This is much lower than the salary to GDP ratio in countries like the UK, the Netherlands, Sri Lanka, South Korea, etc. The Government of India is supposed to constitute a Central Pay Commission almost every 10 years. In the last decade, the GDP of India, for most of the time, has grown by over six per cent. Gross tax revenue has increased by around 15 per cent.

The exchequer — which was comfortably able to absorb the implications of Sixth Pay Commission recommendations, replete with huge arrears — would not be under pressure this time. In a liberalised India, Pay Commission recommendations should be seen as a comprehensive instrument to reform and revitalise the whole administrative structure and for creating a just order.

Appropriate remunerations should be used to attract the best talent from the market, and to ensure effective and efficient delivery of services.

The nation should treat comprehensive outgo on account of salary and allowances as an investment in people who are entrusted with the task of enhancing the delivery of socio-economic benefits for the country.

Dhruva Kumar Singh is director, ministry of rural development. He can be reached at dks.dca@nic.in

$ No pressure on the exchequer ***