Ind-Ra: Seventh Central Pay Commission - A Demand Booster for the Economy, But May Pose Challenge for Fiscal Consolidation

The Seventh Central Pay Commission (7CPC) has proposed an increase of 23.55% in the pay packet (salary and allowances) of central government employees and pensioners, which will become effective from 1 January 2016. The payout is expected in FY17.

7CPC award is likely to cost the central government INR1.021trn in FY17, a 23.55% increase from FY16. However, factoring in the arrears of January-March 2016 to be paid in FY17, the total impact is estimated to be INR1.276trn (0.81% of GDP). However, after factoring in the share of the central government in increased tax collection (direct and indirect), the net impact on the exchequer will be lower at 0.68% of GDP. Yet at a time when the government is pursuing the path of fiscal consolidation, this will pose a serious challenge for the government in terms of not deviating from the fiscal deficit targets as announced in the FY16 budget.

Ind-Ra's estimate shows that after sharing of central taxes with state governments, the central government's net tax revenue will increase by INR210bn in FY17. The consumption boost to the economy is estimated to be INR612.6bn (0.39% of GDP) and increased household savings are estimated to be INR408.40bn (0.26% of GDP).

A major difference between the previous pay commissions and the seventh pay commission is that there will be hardly any lag between the day from when the award is to be implemented and the date on which the award was announced. As a result, the size of the arrears to be paid will be negligible compared with the payouts of the fifth and sixth pay commissions. The fiscal impact of the arrears of the sixth pay commission was so onerous that it was spread over two fiscals, FY10 and FY11.

Although 7CPC is applicable to central government employees, the salaries and pensions of state government employees, urban local bodies, central and state public sector undertakings, autonomous bodies and universities will also be revised in FY17 and FY18. Ind-Ra's estimate shows that the demand boost to the economy as a result of the revision in the salaries/pensions of the above mentioned employees will be at least four times the 7CPC's award.

Ind-Ra does not see any immediate threat to inflation due to the award of 7CPC. Though CPI inflation may inch up somewhat due to higher prices of services, impact on WPI is likely to be muted due to the counter balance provided by the deflation in commodity prices and the availability of excess capacity in several manufacturing sectors. A rise in demand is likely to not only increase capacity utilisation but may also help revive the investment cycle earlier than expected.

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