On June 28th, the Union Cabinet approved the recommendations of the Seventh Pay Commission. The Pay Commission, whose duty is to revise the pay structure of Government employees and pensioners across India, has recommended an overall hike of 23.5% in salaries.
Considering the rise in inflation and the fact that Government employees are (at least in theory) engaged in work that is critically important to the nation, this seems a reasonable hike, coming after 8 years (The 6th pay commission was formed in 2008), however let us go over the highlights of the proposals to understand the implications better:
- Financial impact of over Rs. 1 lakh crore for Financial year 2016-17
- Over fifty allowances being paid currently are to be abolished and another 37 merged with other allowances, however this proposal has been sent to committee for further deliberation.
- The ceiling of House Building Allowance has been increased substantially from Rs 7.5 lakhs to Rs 25 lakhs. It is hoped that this will provide a boost to the real estate market.
- Gratuity limit has been increased from INR 10 lakh to 20 lakhs. Benefits for military and defence personnel have also been increased. This will provide a lot of comfort to those who are retiring shortly.
- For defence personnel like Brigadiers and Lieutenant Colonels the pay scales have been improved
- Basic pay has been hiked by nearly 20%. In conjunction with other increases this is what leads to overall increase of 23.5%
- Increments are continued at 3% but since they will be on a higher basic pay, the impact is substantial.
- Minimum pay is being hiked substantially from Rs 7,000 per month to 18,000 per month. This naturally is a great help to the lowest grades of government employees.
While these are only some of the highlights of the Commission’s recommendations that have been accepted, the impact of these recommendations will be known over the coming years.
Firstly, it is hoped that this will create a demand-push for growth, and also ultimately increase industrial production. However, there is a possibility that this will result in increased inflation
Secondly, with rationalization of pay grades and bands, there should be administrative efficiency for the Government.
Thirdly, the increased pay scales should lead to attracting of better talent to government jobs. For too long, India’s best minds have preferred to go abroad or work in private sector rather than contribute to the nation by working for the state. With more competitive salaries in addition to the already existing perks of being a Government servant it can be hoped that this trend can be reversed.
As mentioned above, the increase in HBA an Gratuity is expected to revive the sluggish real estate sector. Government employees are one of the biggest markets for real estate and with this they might finally be able to afford to buy a house on retirement.
State governments will also almost inevitably have to hike salaries for their employees as well. This means a cascading effect throughout the economy.
Ultimately, any hike is inflationary and we should brace for a further rise in retail prices. However, it can be no one’s argument that government payscales were not due for a revision after 8 years. The quantum may be debated, but it is equally true that no Government will refrain from hiking these salaries without facing serious political consequences. Accepting this reality, let us hope that the positive effects outweigh the negative.