The seventh pay commission was formed by the UPA government on 28th February 2014. It was headed by Justice Ashok Kumar Mathur. Its objective was to produce a new pay scale for the government employees. This exercise takes place once in every 10 years. Its recommendations will affect nearly 36 lakh central government employees as well as pensioners. On November 19, 2015, 7th Pay Commission recommended 23.55% hike in pay and allowances which will be implemented from January 1, 2016.
Why a pay commission that affects the lives of government employees should be a matter of concern for common man. The reason is that because its recommendations will affect the government finances and in the countries finance health.
There are concerns that it could challenge the government’s goal of achieving a fiscal deficit of 3.5% in the year ending in March 2017, unless India can cut spending or raise revenues. According to the finance minister, the additional financial burden on central government coffers in 2016-17 will be a shade above Rs1 lakh crore, of which Rs73, 650 crores will come from the general budget and the remaining Rs28,450 crore from the railway budget. The recommended hike in basic salary (including dearness allowance) stands at 16%, while that in housing rent allowance, other allowances and pensions are 138.71%, 49.79%, and 23.63%, respectively. Once implemented, the minimum pay will be increased from Rs6,600 to Rs18,000 per month, which is definitely good news for the government employees at the lowest rung, while the maximum pay will be hiked from Rs80,000 to Rs2.25 lakh per month, with a salary of Rs2.5 lakh having offered to the cabinet secretary.
This will, in turn, affect India’s credit rating. The outflow will not only be limited to the Central Exchequer alone but will have an effect on the financial health of states also. This will affect all over growth in salaries as the private sector will also demand a wage rise to be compatible with government employs. This will affect the financial health of private sector which is already burdened by slow growth.
It is historical fact that every pay commission brings a phase of high inflation and financial mismanagement. It remains to be seen how the government will deal with such a situation which is already burdened by the allegation of intolerance and a huge economic agenda. This will force Reserve Bank to hold policy rates which will affect growth.
There are many good points also associated with it. The pay commission has looked into many allowances that have become irrational in modern times like a hair-cut allowance of Rs.5 and had recommended that as many as 50 allowances should be withdrawn. This will bring more clarity in pay structure.
The commission has recommended the introduction of performance-related pay for all categories of central government employees, based on annual performance appraisal reports. This will increase the efficiency of government officials.
This will also release a large sum of money into the economy which will hike demand and can bring more growth in the economy. Especially consumer durables can expect to benefit most from this pay hike. The boost in demand will give the impetus to the economy it needs to grow.
The biggest concern is that the government is trying hard to put in place GST by 1st April 2016 and it is a historically proven fact that no government in the world came back to the power were GST was implemented because the benefits of GST are reaped only in long run but in short run it brings high inflation due to high tax rate. So if the recommendations of 7th pay commission are implemented on 1st January 2016 and GST on 1st April 2016 then the government and the RBI will have a tough task in hand balancing the inflation, growth, and the fiscal deficit.