On November 19 when Justice AK Mathur submitted the 900-page Seventh Pay Commission report to Finance Minister Arun Jaitley there were smiles on the face of 48 lakh Central Government employees and 55 lakh pensioners. However, amid all the ecstasy and celebrations, economists are divided in their opinion over the impact of an additional Rs 1.02 lakh crore burden on India’s economy at a time when the Government is struggling to cut its fiscal deficit. So will the 7th Pay Panel report be a boon for the BJP-led NDA-II Government or the move will boomerang on it like the “India Shining” campaign of the NDA-I regime? Bureaucracy Today analyses the issue.
Amidst a demand slump in the Indian economy, the recommendations of the Seventh Central Pay Commission (SCPC) brought a breath of fresh air to about one crore households which had cut their spending due to the huge gap between the rising prices and their income.
The proposed 23.55 percent hike in the salaries and pensions of Central Government employees has alarmed a section of economists, ratings agencies and brokerages which warn of a dent in India's finances though the other section and the Government express confidence that the fiscal deficit targets will not be breached.
The Commission has proposed a new pay matrix, replacing the existing pay bands and grade pay, for the Central Government employees and pensioners, with a monthly starting pay, inclusive of dearness allowance (DA), of Rs 18,000 and an apex level pay of Rs 2.5 lakhs. The starting pay now is Rs 7,000 per month and the highest salary is Rs 90,000 (fixed) excluding the DA which is 119% at present.
IMPACT ON FISCAL DEFICIT
Ratings agency Fitch says the recommendations, “if implemented in toto, could challenge the Government's goal of achieving a fiscal deficit of 3.5 percent in 2016-17 unless its expenditure is cut or revenue raised”. Similarly, another international ratings agency, Standard & Poor's, opines that the implementation of the Pay Panel proposals will "put pressure on the fiscal position of the Government and will act as a constraint to sticking to the roadmap for fiscal consolidation".
However, former Reserve Bank of India Governor Bimal Jalan feels otherwise. “I don’t think the implementation of the Seventh Pay Commission recommendations will negatively impact the Government’s fiscal deficit. With the increase in employees’ income, consumption will also increase. If the consumption increases, the Government will earn more from Excise Tax, GST, etc. An increase in consumption will lead to an increase in Government revenue,” he tells Bureaucracy Today.
Echoing Jalan’s views, former Revenue Secretary Sunil Mitra says, “Our fiscal deficit is very much in control. Whether the implementation of the Pay Panel recommendations will impact the fiscal negatively, I cannot say. It may not really impact the fiscal deficit because the macro-economic fundamentals in the country are very good at the moment. Other than inflation in some food items, generally the prices are down.”
Earlier in February this year, Finance Minister Arun Jaitley had set the fiscal deficit target for the FY 2015-16 at 3.9 percent of the gross domestic product and said the Government would reduce the target gradually to 3 percent by FY 2017-18.
Brokerage firm Citigroup warns that in the backdrop of the Pay Panel recommendations, the Government might have to “make a cut in public investments” to achieve its fiscal deficit target, offsetting “the gains on economic activity somewhat”.
“The fiscal impact of the Seventh Pay Commission report, as with the previous ones, is likely to be felt over the next two years: 2016-17 and 2017-18,” says Sonal Varma of Nomura, a broking firm, in a research paper.
Seeking to allay the fears, Economic Affairs Secretary Shaktikanta Das says, “The Commission's report was expected and the Government knew that it would take effect from January 1, 2016. Obviously the Government was not aware of its thinking. But the Government always has a broad estimation of what is going to be the impact of Pay Commission recommendations and accordingly internally a kind of risk matrix is prepared. The Government will deal with the situation. We will work out our numbers. So far as the fiscal consolidation roadmap is concerned, that will be maintained.”
Finance Secretary Rattan Wattal tells Bureaucracy Today, “While there is fear of some revenue shortfall, especially on the direct taxes front, the Government does not want to go in for any expenditure cuts to meet the deficit target. The FY16 plan spending target is realistic and reasonable.”
MORE BURDEN ON PUBLIC?
Though the Government is assuring the nation that the Pay Panel report will not affect the Indian economy, some experts argue that the State exchequer might have to shell out more with the Government likely to impose new taxes to meet its expenditure.
G Chokkalingam, Founder and Managing Director of the Mumbai-based Equinomics Research and Advisory, opines, "The additional income in the hands of Central Government employees will constitute about 0.5 per cent of a projected GDP in FY17 and may not give any boost to consumer goods manufacturers as a major part of this would be chucked away from them by revival in inflation rates and further higher duties (on fuels as long as the oil price remains subdued) and taxes (especially on services) likely to be imposed by the Government to meet its growing expenditure needs."
However, Bimal Jalan seeks to disagree. “I don’t think that the public has to pay more taxes to meet the expenditure requirement. The impact of the Seventh Pay Panel report on the budget will not be substantial. I would not worry about that part. It is reasonable and can be handled,” the former RBI Governor told Bureaucracy Today.
Madan Sabnavis, Chief Economist of ratings agency CARE, says though the quantum of the recommended increase in the salaries and pensions of the Governemnt employees is justified, the amount is quite large and “absorbing Rs 1 lakh crore is a big task”.
PRESSURE ON STATES
The impact of the SCPC recommendations in all its likelihood will trigger a similar demand in the States, a fact acknowledged even by Jaitley. The Union Finance Minister admitted at a business summit in Jaipur recently that the implementation of the 7th Pay Commission recommendations will put “slight” burden on the States’ expenditure.
Former Revenue Secretary Mitra also opines that though there will be pressure on the State Governments, it won’t be huge. “The State finances are much better than those of the Central Government. I don’t anticipate that SCPC recommendations will have a huge pressure on public finance or for that matter State finances. Most State Governments have improved their finances and are better placed than the Centre on the fiscal front,” Mitra tells Bureaucracy Today.
Echoing his views, Jalan articulates that the SCPC would significantly boost the Centre's income tax collections which will also benefit the States as the Centre's gross tax revenue needs to be shared with them.
However, Niti Aayog Member Bibek Debroy vehemently disagrees. "The repercussions of implementing the Seventh Pay Panel report will be serious on the States’ fragile finances. When starved of funds, the State Governments slash capital expenditure and the Pay Panel report will force the States to scale back their development spend," Debroy tells Bureaucracy Today.
He also says the Railways, which is already reeling under financial constraints, will also suffer as the wages of its staff go up. Of the total Rs 1.02 lakh crore revised salary, the Union Budget will bear Rs 74,000 crore while Rs 28,000 crore will be borne by the Rail Budget.
Debroy’s apprehensions are not unfounded. “Most of the States are working around the 3% fiscal deficit number. Accommodating the additional pay increase would be a touch and go. A few weeks ago the Central Government put forward the Ujwal Discom Assurance Yojana (UDAY) under which the States are to restructure their debt-ridden Electricity Boards (SEBs). This means bearing some additional debt in the next two years. Depending on the timing of their Pay Committee recommendations, if any, the State Governments will have a sticker path to cross as they would have to address the necessity of higher salaries and the option of reforming the SEBs along with other pressures like spending partly on setting up Smart Cities and launching other programmes,” Madan Sabnavis says.
Though the Central Government has set up a “cell” to examine the Pay Panel recommendations, ambiguity remains as to how the Government will bring the Rs one lakh crore money to fund the increased salaries. The challenges are at multiple levels and very little has been said in the report about addressing them. The additional expenditure has to be compensated from somewhere. To fulfil the Fiscal Responsibility and Budget Management objective, the Government either has to increase its revenue or cut down its expenditure and this is where the problem lies. It will be a major challenge for the Finance Minister when he presents the FY2016-17 budget in Parliament. It is just a matter of few months before we know how well the Government has worked on its fiscal arithmetic. For the time being, let us hope that the Government does not further bend the back of the common man who is already facing the heat of spiralling prices.