7th Pay commission will impact government finances, but boost economy too

The Seventh Central Pay Commission recommendations have largely been accepted by the central government, thus benefiting its 1 crore employees and pensioners. Moreover, this step is also expected to boost demand that can support the Indian economy amidst the post-Brexit global uncertainty. However, one can’t ignore its possible impacts on inflation and government finances.

With the passage of 7^th pay commission, the entry-level salaries have been increased from Rs 7,000 per month to Rs 18,000 a month; other than this, the Cabinet Secretary, which is the top civil servant post, will have about Rs 2.5 lakh a month, as against the present Rs 90,000.

The increased salaries would be paid from tomorrow, i.e. July 1^st 2016, while the arrears will also be paid within the year.

In response to some trade unions threatening strike, FM Arun Jaitley said that after the 7^th pay commission, government salaries have become distinctively higher than private sector salaries.

Earlier, it was expected that the overall impact of the commission would be Rs 1.02 lakh crore in FY17; however, reports now suggest a much lower impact because of the delay in paying allowances, which would distribute the impact between the current and upcoming FY.

Jaitley added that the fiscal deficit target of 3.5% of GDP will not get affected by this, since provisions had already been made in the budget for the revised salaries and the targets were set accordingly.

Also, the government has bid goodbye to the system of pay bands and grade pays, while welcoming a simpler and transparent system.

The pay commission would give the economy a much required boost since it will push forward an already strong urban consumption, benefiting various sectors like automobiles, white goods, mobiles and FMCG.

"When people get more money, it comes back in the system in the form of taxation. Savings will increase... spending will go up," said Jaitley.

Not only spending, the government is also expecting a raise in financial savings, since a part of the hike would most likely be saved.

However, there are chances of inflation too, even though economy experts do not expect it to be much, considering an already excess capacity in the economy and forecasts of a good monsoon.

"Inflation may rise by a few basis points but that increase would be neutralised by higher capacity utilisation and better monsoons, which will contain food inflation," Indranil Pan, chief economist at IDFC Bank, told ET.

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