‘Higher salary will lead to higher spending’

The wait for over 49 lakh government staff for higher allowances just got a bit longer with Union cabinet yet to take a call on it due to finance minister Arun Jaitley being away in South Korea.

But as soon as a decision is taken on higher perks it is set to boost consumption and provide a booster doze to the economy which has decelerated in recent months. There are expectations that the rise in allowances would be applicable from July 1coinciding with the implementation of the country's biggest indirect tax reform, the Goods and Services Tax (GST). Economists and tax experts have said GST alone will add 1.5-2 per cent to the GDP.

Assuming that government will accept the 7th pay recommendations on allowances, one assumption is that it will result in about a Rs 29,300 crore fund infusion into the economy.

"Of course, it will give a big boost to consumption. Higher salary will lead to increased spending on part of the government staff. The sooner the government decides, the better will it be. The decision could have come earlier but even if it comes now, the timing is perfectly right," said Rajiv Kumar, noted economist and founder director, Pahle India Foundation.

The impact of hike in salaries of government employees is likely to be seen next year. This is set to further increase capacity utilisation and improve market sentiments. An upward pay revision and their resultant effect on demand would also help create more jobs which had been hit hard after demonetisation.

In the upcoming festive season also its impact would be visible.

"The seasonal demand around the festive season will also get a fillip. It will improve sentiment," Rajiv Kumar further said.

The Centre had set up a panel headed by finance secretary Ashok Lavasa in view of the significant changes recommended by the 7th pay panel in the allowances structure and a large number of representations received in this regard from various employee associations. Some of the ministries and departments had also conveyed their apprehension on this.

The 7th pay panel had recommended that of a total of 196 allowances, 52 should be abolished altogether and 36 abolished as separate identities by subsuming them in another allowance.

The Lavasa committee had been given four months’ time to submit its report. This is did in April. The report was then placed before an empowered committee of secretaries (E-CoS) to firm-up the proposal for approval of the Union cabinet.

According to finance ministry officials, the Lavasa panel has suggested modifications in some allowances applicable universally to all central government employees and also for those in specific categories, including railways and defence. The suggestions have been made after wide consultation with staff unions and closely examining the 7th pay Commission recommendations.

After the committee sought responses, it received representations and demands for modifications in as many as 79 allowances. Various staff associations of the Indian railways, postal department and department of atomic energy, among others, had given their representations

"After consideration by the E-CoS, the proposal for implementation of the 7th CPC (central pay commission) recommendations on allowances after incorporating the modifications suggested by the committee on allowances in its report shall be placed before the cabinet for approval," the finance ministry said.

Official sources said that the cabinet would now take up the report for consideration and approval, possibly on June 21. The lakhs of central government staff are keenly waiting for their raise.

While a section of employees are expecting a modest raise, the majority are not very bullish maintaining that the NDA government has so far not been generous towards them. They are hoping that house rent allowances (HRA) could be fixed at 27 per cent of the basic pay in a city with population more than 5 million. This would be lower than the present rate considering a 23.55 per cent rise in salary as per the 7th pay commission. But in absolute terms, it will be higher.

As private consumption expenditure has been muted after demonetisation, the additional cash flow into the market would help to recover some of the ground. Pronab Sen, former chairman of the National Statistical Commission, said that the extent to which economy will get benefit will depend on the level of increase in allowances.

"Whether it (cabinet decision on allowances) will lead to an increase in consumption depends on the decision. It depends on how much raise is there. The possibility of status quo is also there. At this point of time, one does not know the level of increase in allowances," he said.

But once the central government takes a decision on it, the state governments would also be under pressure to give a similar hike. Thus, the impact of both the Centre and state governments effecting the rise in pay packages would be significant.

Given that the fiscal maths of state government will not be favourable, the implementation of the new pay packages could come in phases. Some state governments like Uttar Pradesh and Maharashtra, which have decided to waive farm loans, would find it difficult to give salary hikes immediately.

"There is a fiscal aspect too of the salary hike which is very important. It is difficult to say if all the state governments are in a position to implement the higher pay package award," said economist Rajiv Kumar.

"Given the fact that only 3-4 states have so far committed to farm loan waiver, other states can increase compensation. But, overall fiscal health of the states is a matter of great worry especially because of UDAY bonds and farm loan waiver. This is a cause of concern," he added.