Pay bonanza: Impact to be worse

The Seventh Pay Commission’s recommendations for revision of salaries of government staff and pensions will hit the national exchequer and the economy hard when they are least prepared for it. The proposals are to come into effect from January 1, 2016, and the government has no option but to implement them. The decadal pay commission awards are political exercises too, and considering the large number of beneficiaries and their organised nature, no government will dare to reject or dilute the recommendations. Implementation of the proposals will certainly challenge the Narendra Modi government’s claimed goal of “minimum government and maximum governance”, as there is no indication of efforts to reduce the bloated bureaucracy or to increase productivity and efficiency. All past commissions have proposed cuts in staff strength. But this has hardly been heeded. The latest one has also proposed such cuts, and a system of performance-linked pay for employees. No one expects these ideas to be tried.

The proposed increases amount to a 23.5 per cent rise in salaries and pension for 47 lakh employees and 52 lakh pensioners. They will result in an outgo of over Rs 1.02 lakh crore from the exchequer in the first year. Where will the money come from? The Commission has assumed that the government has the ability to pay, because it is the government. The government had dilly-dallied on the demand for “one rank, one pension” for the armed forces, but the panel has now granted it to all pensioners. The last pay commission’s recommendations had set the economy back by two years. The impact will be worse now, because all sectors, including agriculture and industry, are in a worse shape. With such a huge and unproductive expenditure on its hands, the government will find it difficult to meet the fiscal deficit target. States and public sector enterprises will also have to follow suit with salary increases. The huge release of money into the system will push up inflation, as has happened after pay panel report implementations in the past. Ironically, much of what is gained by the salary hikes will be lost to price rise.

The government’s capital expenditure plans may be affected unless new revenue sources are found. The tax payer will have to foot more unproductive bills. There is hope that the higher spending power of employees will create fresh demand which will spur economic growth and lead to increased revenues. It can happen, but the degree of its claimed impact is exaggerated. In any case, the need to pay without the ability to call the tune is not a good prospect.