This hike will cost the national exchequer at least Rs 1.02 lakh crore or nearly 0.7 percent of the GDP. Despite the costs, the hike is the lowest in the last seven decades. As per the commission’s recommendations, the minimum monthly pay has been fixed at Rs 18,000.
Meanwhile, the maximum pay has been set at Rs 2,25,000 per month for apex scale and Rs 2,50,000 per month for cabinet secretary and others at the same pay level, as against the current Rs 90,000 per month. The move to hike salaries comes at a critical moment for the Centre, which has been seeking ways to reboot the economy.
Of course, there are concerns about the impact of a salary hike on inflation. The past few months have witnessed a steady rise in retail inflation. But the benefits for economic growth far outweigh the risks to inflation. The global economy is in the doldrums, especially after Britain’s decision to exit the European Union.
With the slowdown in exports, the absence of private investment on the ground and a stress-ridden banking sector, the government’s decision to put more money in the hands of people through increased wages could facilitate a consumption-led recovery.
This hike will aid the revival of consumer demand, especially for consumer durables and services in urban centres. For example, the sale of two-wheelers and passengers cars could see a rise once salaries of central government employees are hiked. This should come as a significant boost to the fortunes of vehicle manufacturers at a time when demand, especially in the rural markets, is yet to revive.
Volumes of motorcycles and small cars have remained subdued over the past one year and should see a pick up once disposable incomes of government employees go up. Another beneficiary of the Centre’s announcement on Wednesday is the housing sector, which has been down in the dumps for the past few years. Experts contend that the rise in income and spending capacity of government employees will increase demand, bringing more customers to the beleaguered sector.
In other words, an increased payout, including arrears, might lead to higher spending, which would, in turn, boost consumption demand. But experts contend that it will also spread the risk of inflationary pressures. However, a good monsoon and lower commodity and crude oil prices (post-Brexit) are likely to offset the effects of a salary hike on inflation.
Another possible downside for the Centre is the cost to the public exchequer. As stated earlier, the recent hike in central government salaries is likely to cost Rs 1.02 lakh crore, or nearly 0.7 percent of GDP. After accounting for the higher salary outgo, the government must find more resources to augment the much-needed public spending push in infrastructure.
The government can tap into higher indirect tax collections and divestments of public sector entities to raise the necessary resources for higher capital expenditure. But in the larger scheme of things, this concern is minimal since the government can find a whole host of ways to raise capital. One of the other key recommendations made by the 7th Central Pay Commission, headed by Justice A K Mathur, is for the introduction of performance-related pay for all categories of central government employees. The panel also sought a significant change in the bonus system.
"We are also of the view that there should not be automatic payment of bonus and all existing schemes of payment of bonuses should be linked to productivity," it said. The panel proposed that until the time the performance-linked pay scheme is implemented, the existing bonus schemes should be reviewed and linked to increased productivity under clear parameters. The rise in salaries and an emphasis on productivity could be the ingredients required to attract better talent to government service.