Fiscal impact of 7th Pay Commission under watch: DBS

Says pay/allowances could rise by 16% following the rollout of the Seventh Pay Commission

Bulk of the impact of Seventh Pay Commission, under which salaries of government employees will be reviewed, is likely to be absorbed by the Budget of the next financial year, 2016-17, says a DBS report.

The global financial services major said pay/allowances could rise by 16 per cent following the rollout of the Seventh Pay Commission.

"If adopted, bulk of the impact (of the Seventh Pay Commission) will be absorbed by the FY16/17 Budget," the DBS report said, adding that "historically, the pay commission's rollout has been negative for fiscal balances."

As per DBS, the increase in bonus payments and pay/ allowances would cumulatively imply a first-round increase in spending to the tune of 0.2-0.3 per cent of GDP in FY16/17, "putting deficit targets at risk".

"These higher spending needs will require the government to either re-channel fiscal savings, restrain spending elsewhere or renege on the fiscal deficit targets," it added.

The Seventh Pay Commission, set up by the government to revise remuneration of about 48 lakh central government employees and 55 lakh pensioners, will submit its report by December 31.

DBS said that the full impact would get clearer when the pay commission tables its recommendations later this year.

The recommendations of the Seventh Pay Commission are scheduled to come into effect from January 1, 2016.

The previous Sixth Pay Commission was rolled out in the third quarter of 2008, at a time when the economy was reeling under the impact of the global financial crisis.

"Implementation of the revised salaries/ pensions (plus arrears), along with farm loan waivers and other stimulus measures saw the fiscal deficit balloon from -2.5 per cent of GDP in FY07/08 to -6.0 per cent in FY08/09 and stay high for another year before easing off," the report added.

The government constitutes the Pay Commission almost every 10 years to revise the pay scale of its employees and often these are adopted by states after some modifications.