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Tuesday, July 5, 2016

ET in the Classroom: Seventh Pay Commission and consumption explained

Last week the government approved recommendations of the Seventh Pay Commission. The hikes will put money in the hands of more than 10 million people which will boost consumption. It will also increase government spending, putting pressure on fiscal finances. 

1. What is a pay commission? 
Pay commissions are government appointed committees that are set up periodically to suggest new salary and pension structures for current and former government employees. The seventh such commission was appointed by the government on 28 February 2014 with four members. It got 18 months, just like the six other commissions before this, to give its recommendations. 

2.What were the recommendations? 
The commission report submitted in November 2015 recommended an overall 23.55% increase in salaries, allowances and pensions of which salaries could rise by 16% and allowances and pensions by 63% and 24% respectively. The commission also recommended a health insurance scheme for staff and pensioners and doubled the gratuity ceiling to Rs 20 lakh but retained the annual increment at 3%. 

3. What will it be its impact on consumption? 
The government is the largest employer in the country and an increase in salaries of state and central employees has boosted consumption historically. Economists expect the implementation of the committee recommendation to boost discretionary spending for at least two years after the money flows out from the government. 

People are likely to buy vehicles, electronic goods, furniture or even spend most of the hikes to buy houses, boosting the sales of these products and creating a ripple effect in the economy. Savings may also rise and this year a likely good monsoon will also boost the rural economy. The lift up in both urban and rural consumption are likely to give a fillip to the country's GDP. 

4. What will be its impact on government spending? 
While the government has given its go ahead for implementing the commission's recommendations it has not approved the 63% recommended increase in allowances (including a 138% rise in house rent allowance). As a result the pressure on the government's budget will be limited. Japanese brokerage Nomura estimates that the cumulative fiscal burden on the government from the pay and pension hike, including arrears but excluding allowances, will be Rs 60,600 crore out of which Rs 43,200 crore has been budgeted for. Hence the additional Rs 17,400 could marginally challenge the government's target of keeping the fiscal deficit within 3.5% of GDP in the current fiscal. 

Source:-The Economic Times

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