Rhetoric Vs Reality
The Seventh Pay Commission’s recommendations have generated huge euphoria among Central Government employees. Given the fact that no Government has struck off any Pay Panel’s recommendations till date, one can assume that the present dispensation at the Centre will also give a green signal to the Commission’s suggestions. The Panel’s recommendations have brought cheers to over one crore households at a time when the prices of essential commodities have hit the roof. Besides, benefitting 48 lakh Central Government employees and 55 lakh pensioners, the recommendations, if implemented, will also give a fillip to the image of the BJP which has recently taken a beating at the Bihar hustings.
But everything said and done, will the implementation of the Pay Panel recommendations, which will put an extra burden of Rs 1.02 lakh crore on the Government, be a wise move at a time when the country is struggling to cut its fiscal deficit? Our Cover Story explores this uncomfortable question and leaves it to BT readers to decide.
Seeking to quell the concerns about the Pay Commission recommendations on the fiscal deficit, the Finance Ministry said that a higher GDP growth rate next year will help fund the extra expenditure of Rs 1.02 lakh crore. The logic is that an increase in their income will lead to higher spending by Government employees on consumer goods which, in turn, will spur the manufacturing sector out of its stupor. Though the Government’s argument sounds rational, the fact is that it is simply based on assumption. In the past we have seen that the implementation of recommendations by successive Pay Commissions was followed by a jump in retail inflation. And there is every possibility that such situation will occur again.
And as pointed by S&P's Rating Services India Sovereign Analyst Kyran Curry, "India has a long history of high fiscal deficit and borrowing. The recommendations make the Government job of achieving the 3.6 percent fiscal deficit target in 2016-17 more difficult."
Secondly, the total impact of the Pay Panel report implementation will be much more than Rs one lakh crore. The increase in Central pay scales would mean that the State Governments will also have to revise the pay scales of their employees. Now if the Central and State Governments increase their employees’ salaries, it would necessitate corrections by PSUs, PSBs and other independent bodies as well. Therefore, the total impact in the days to come will be much more than the Rs 1 lakh crore we are talking of.
The OROP recommendation extended to civilian Government employees is definitely a good step but the main challenge is the amount of money involved which would not only be recurring but also would keep mounting at an accelerated rate with all the old pensions getting indexed to the new benchmark.
Now the question is from where will the Government bring such a huge amount of funds? Either it has to cut down its expenditure or find new ways to increase its revenue. Cutting down on expenditure would mean lowering investments in infrastructure projects or cutting down subsidies, the moves unlikely to be taken kindly as it would have major economic and political ramifications as well. The only option left would be to increase its revenue which would mean more or new taxes being levied. Recently we have seen the imposition of the Swachh Bharat cess to provide a boost to the Clean India initiative. Similarly, it would be no surprise if the common man has to shell out more in the form of taxes to meet the Centre’s fiscal deficit target.
It would be interesting to see how the Government works on its fiscal arithmetic and keeps a brave face in the tug-of-war between the rhetoric and the reality in the budget session of Parliament next year. Till then we can only keep our fingers crossed.