7th Pay Commission To Boost Consumption In The Economy By 451.1bn

The union cabinet cleared the Seventh Central Pay Commission (7 CPC) recommendations, which boost consumption to the economy by INR451.1bn (0.30% of GDP) and increase savings by INR307.1bn (0.20% of GDP), says India Ratings and Research (Ind-Ra). Ind-Ra believes that after the sharing of central taxes with the state governments, the central government’s net tax revenue will increase by INR 141bn (0.09% of GDP) in FY17.

The revised salaries of central government employees are likely to be paid from July 1, 2016. While the employees will get salary arrears from January 1, 2016, allowances will be paid only from 1 July 2016. Thus the gross impact of 7 CPC is likely to be INR 947.75 bn (0.63% of GDP). The central government will receive income tax on this pay out and collect excise duty on consumption, after sharing the increase in income tax and excise duty with states. Thus the net impact on the central government finances is estimated to be INR 806.41 bn (0.54% of GDP).

Ind-Ra believes the impact of pay revision of state government employees will be felt only in FY18. The Seventh Central Pay Commission award is expected to be less severe on state finances than expected earlier due to a lower arrear pay out. In all likelihood, the impact of a salary revision of the Seventh Central Pay Commission on state government finances will be INR1.58trn in FY18 (0.95% of FY18 GDP).

Salaries and pension of state and central government employees are not alike; however, the common thread between the revisions is constitution, award and implementation. Now that the central government has accepted the report of the Central Pay Commission, state governments will also follow suit after a gap of six months to a year.

A major difference between the previous pay commissions and the seventh pay commission is that there is hardly any lag between the day from when the award is to be implemented and the date on which the award was announced. As a result, the size of the arrears to be paid will be negligible compared with the payouts of the fifth and sixth pay commissions. The fiscal impact of the arrears of the sixth pay commission was so onerous that it was spread over two fiscals, FY10 and FY11.

Although 7CPC is applicable to central government employees, the salaries and pensions of state government employees, urban local bodies, central and state public sector undertakings, autonomous bodies and universities will also be revised in FY17 and FY18. Ind-Ra’s estimate shows that the demand boost to the economy as a result of the revision in the salaries/pensions of the above mentioned employees will be at least four times the 7CPC’s award.

Ind-Ra does not see any immediate threat to inflation due to the award of 7CPC. Though consumer price inflation may inch up somewhat due to higher prices of services, impact on wholesale price index is likely to be muted due to the counter balance provided by the deflation in commodity prices and the availability of excess capacity in several manufacturing sectors. A rise in demand is likely to not only increase capacity utilisation but may also help revive the investment cycle earlier than expected.

The pay panel had in November 2016 recommended 14.27% hike in basic pay at junior levels, the recommendations amount to 23.55% overall hike in salaries, allowances and pension. The date of implementation for the recommendations is 1 January 2016. However, it is likely that allowances will be paid only from 1 July 2016.

About the Author

Dr Devendra Pant
Chief Economist, India Ratings & Research