7th CPC: Beneficiaries and the Economy

The recommendations of the 7th Central Pay Commission (CPC), set up in 2006 under the UPA government, have garnered mixed responses from the various stakeholders. The Empowered Committee of Secretaries (CoS), set up in January this year and headed by cabinet secretary P.K. Sinha submitted its report on the recommendations of the commission to the Finance Ministry based on which the ministry drafted a cabinet note. The accepted recommendations suggest a 23.55% overall increase in salaries and allowances of about 50 lakh employees and 58 lakh pensioners of the central government. Once implemented this will result in an increase in the minimum salary from Rs. 7000 to Rs. 18000 and the maximum salary will be Rs. 2,50,000 for the Cabinet Secretary and others currently at the same level. Arrears will be paid in a phased manner in the current fiscal year itself unlike in the past when it was paid in the next financial year.

Pay revision of such a large scale is a very delicate issue for any government as its impacts are widespread. On one hand are the expectations of the employees while on the other is the nation’s economy. The government thus needs to draw a very fine line while implementing the policy and the central government in the case of the 7th pay commission seems to have more or less managed the task.

Is it enough?    

The beneficiaries of the hike do not seem very pleased with the government’s decision. Some of the dissatisfaction arises from the fact that the hike (approx. 14% overall) this time is the lowest in independent India’s history. On top of that, the precedent set by the UPA government during the implementation of the previous commission’s recommendations, resulted in soaring expectations for this time as well. But is the public discontent really justified?

According to a study commissioned by the CPC a driver in the private sector typically earns around Rs. 12,000 a month as compared to Rs. 25,000 for an entry-level driver in government. Similarly, government doctors with an MBBS degree get Rs. 80,500 a month, while their counterparts in the private sector earn only Rs. 50,000. But a private sector doctors with an MD or MS degree and 15 years experience draws around Rs. 3,70,000 per month in contrast to Rs. 1,60,000  for their government counterpart. Post the implementation of the Seventh Pay Commission, a secretary in the Government of India will get Rs2.25 lakh per month, whereas at the same level the corporate gaffer would be getting anywhere between five to 10 times that salary. It has been found that the government employees at the lower levels of the pyramid are much better paid than their counterparts in the private sector but the trend sees an exponential reversal as we move upwards.

In light of the above, the demand of the National Joint Council of Action (NJCA), an umbrella outfit of the central government employees, to raise the minimum monthly salary at the entry level to Rs. 26,000 as against Rs. 18,000 doesn’t hold much weight. The speculations about the government agreeing to Rs. 20,000 as the minimum monthly salary seem to be a step in the right direction.

The government may still be up against possible fear of a backlash from the employees union by ignoring the most significant and progressive recommendation of the 7th Pay Commission. The CPC had recommended that no more pay commissions should be set up and instead a more performance-linked appraisal system must be put in place. In words of a top Finance Ministry official, the government has lost an opportunity to rationalise pays and link them to performance, and introduce meritocracy in the evaluation procedure.

Economic Impact

From the economic point of view, the fact that the pay hikes recommended by the 7th pay commission are much lower than those recommended by its predecessor is welcome. A lower hike means lower increase in disposable income which in turn means lower inflationary impact. We have already seen the impact of the 6th pay commission. The 20 per cent hike that it had recommended ended up at 54 per cent thanks to the generosity of the then government. Not surprisingly, it was followed by a period of high expenditure and higher inflation. The government, this time, should be commended for not giving in to such populism especially at a time when the consumer price inflation remains high.

On the other hand, a hike is still a hike however marginal it may be, which means that there will be an increase in the disposable income of the government employees. As has always been the case, the sates will also follow in the Centre’s footsteps and implement the salary hike. This is expected to boost overall economic growth as this additional money is bound to fuel a healthy demand for a variety of goods and services. The additional expenditure from the government exchequer toward the financial bonanza is projected to exceed Rs.1.14 lakh crore over the course of the current fiscal year ending in March 2017, bringing a significant multiplier effect into play.

For the same reason, the announcement of the pay increase has been eagerly welcomed by industry groups, from automobile manufacturers to consumer durables sellers. One sector that is especially going to benefit from this scenario is the real estate industry as apart from the increase in the investment potential, the ceiling for house building advance has also been increased from Rs. 7.5 lakh to Rs. 25 lakh, thus providing a much-needed incentive for more government employees to invest in housing. Higher pay and pensions are also expected to bolster savings, which could help the banking and financial system channel funds to meet investment demand.

Another important fact to note is that although 1.14 lakh crore is the total increase in the government’s expenditure on account of the salary hike, a majority of it had already been built into the budget for 2016-17. Hence only a small amount Rs 6,900 crore will additionally be required, which can be met from the savings during the year. Hence the government’s target of bringing down the fiscal deficit from 3.9% to 3.5% of the GDP in FY 17 will remain largely unaffected by the decadal hike.

To sum it up, the government seems to have hit the sweet spot in terms of the volume of the hike which in turn may help it to execute a balancing act between popular sentiments and the various economic considerations.

Siddharth Sarup

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