Government offices are currently buzzing with excitement as employees await the recommendations of the Seventh Pay Commission. While the babus may have reason to smile as they may soon have more money in the pocket, it might not be equally good news for others.
What is it?
A Pay Commission is appointed by the government once every 10 years to look at the pay structure of Union and State government employees and pensioners. Typically, the commission takes 18 months to submit its report. The Seventh Pay Commission was constituted in February 2014 under the chairmanship of Justice Ashok Kumar Mathur to submit its recommendations by August 2015.
Pay commissions study the current pay scales and make recommendations on not just pay increases, but also pay structure. For example, the Sixth Pay Commission recommended that transport allowance, which was a lump-sum amount earlier, be paid along with a Dearness Allowance component. Likewise, the House Rent Allowance calculation was pegged to a percentage of pay. From the Seventh Pay Commission, there are expectations of tweaks to retirement age, performance-linked pay and flexible work hours for women and employees with disabilities, apart from pay hikes. The recommendations are expected to be effective from January 1, 2016. If there are delays, the pay revisions would be done with retrospective effect.
Why is it important?
For three reasons. One, it has an impact on government spending and fiscal deficit. For example, after the Sixth Pay Commission was implemented, the fiscal deficit that year doubled to 6 per cent in 2008-09, partly due to the resulting increases.
Currently, Central government pay and allowances account for 1 per cent of the country’s GDP. This could increase if the pay hikes are significant. Based on the medium-term expenditure framework presented to Parliament, a 16 per cent pay increase is likely from the Seventh Pay Commission. This could add 0.2-0.3 per cent of GDP by way of additional expenditure in 2016-17, estimates DBS.
Two, if the government sticks to its fiscal deficit targets, the higher outgo may entail cuts in other items of spending, including capital expenditure.
Three, pay increases granted by the commission can act as a stimulus to the economy by boosting the consumption leg of GDP. At last count, India employed 48 lakh Central government employees and 55 lakh pensioners and over one crore State and local government employees. The Fourteenth Finance Commission estimates that after the Sixth Pay Commission, pay and allowances to Central government employees more than doubled in a four-year period between 2007-08 and 2011-12.
Why should I care?
If you are a government employee, retiree or a job aspirant, you probably would be watching out eagerly for the report. As an investor, you can consider consumption as a theme to bet on — there is a co-relation between pay commission increases and discretionary spending in urban India. Higher disposable income in the hands of the people could aid automobile and property sales.
The country’s fiscal deficit is a cause for concern as it impacts tax policies.
Pay attention to the recommendations of this commission. It matters to the economy, to the deficit and to your portfolio.