Can 7th Pay Commission (7PC) boost Indian Economy?

Introduction

Government of India set up the Pay Commission on January 1946 to review, recommend and make changes in the salary structure of civil and military divisions. The commission makes it’s recommendation within 18 months from the date of its constitution. The Pay Commission is chaired by Justice Ashok Kumar Mathur. Not to mention he is the Retired Judge of Supreme Court and Retired Chairman and Armed Forces Tribunal. The central government or union cabinet permitted the endorsement of 7^th Pay Commission on 26^th June 2016. It was announced that the revised salaries are expected from August 2016. As has been noted, total of 47 lakh central government workers and 52 lakh retirees will be benefitted from the revised salaries through 7^th Pay Commission.

Finance minister P. Chidambaram said that the honourable prime minister of India Manmohan Singh ratified the constitution of 7^th pay commission on 25^th September 2013. However, 1st January 2016 will be the date of execution of 7th Pay Commission.

Central government constitute Pay commission after every decade to brush up the salary structure of government employees. “Term of Reference (TOR)” was taken as the base for revision in the salary structure. In a word, Term of Reference is to have focus or goal to achieve in revising the salary structure.

Why increase in salary?

To determine the amount of increase of salaries, Pay Commission make use of Consumer Price Index (CPI). The rise in price is reflected in the CPI and further as a result of rise in price and later the Dearness Allowance (DA) is calculated. Furthermore all this is calculated by pay commission to find out the minimum pay required by an individual for consumption of household items. Household items include milk, pulses, cloth and other necessary commodities consumed by Indian individual.

With the implementation of 7^th pay commission, based on the Aykroyd Formula, the minimum pay established by the government is set at 18,000 per month and maximum pay is established at 2,25,000 (Apex Sale) and 2,50,000 (Cabinet Secretary). The minimum pay was Rs.7000 per month in last pay commission. The increase of almost 90% is all due to Dearness Allowance. There are around 35% of middle families are government workers in the country. With the implementation of 7th Pay Commission, there will be around 40% rise in the salaries. Adding to this, Real estate in the country is expected to rise in Tier-III and Tier-IV cities.

Debate regarding the 7^th Pay Commission recommendations

There have been several debates happened after the recommendation of 7th Pay Commission.

1. Military versus the Civil services:

The three service chiefs (army, navy and air force) wrote a letter to the defence minister expressing their concerns about the 7^th pay hike. The major reason for the dissatisfaction among the military is the Non Functional Upgrade (NFU) which is available to bureaucrats. In the final analysis, this is responsible for an uneven hike and unequal pay structure between the two (military and civil services).

Statements in support of the pay hike

In one statement from one of the members of the Pay Commission issued says that the government if almost financially broke.

It also makes a point saying that government bears the pension of the all the officers of the defence and hence they don’t see the pay hike as uneven or unequal.

Statements against pay hike

There have been several opposition moves and agitation regarding the 7^th pay commission recommendations. The military representatives argue that it’s not about money but it’s about stature and self-esteem of the army personnel. The disparity between civil and military affects the chain of command. • Considering a statement issued during Haryana agitations, “56,979 police officers failed to do what 5300 soldiers and 5000 paramilitary men did”. Under the light of this statement if the army is going to be the default first responder and is actually going to replace the civil administration in all area from floods to riots to making bridges, then why this pay hike disparity?

The pay achievable by 100% of the IAS officers in 16 years of service is what 1% of the people in army will make in 32 years.

85% of army people retire between the age of 34 to 37 and the fact that they join the service on the cost of their lives; sentiments are bound to overpower logic.

2. Another point of debate is that the pay hike difference or gap is way too much between a class three or class four officer and a class one(IAS,IPS, IFS) and other senior officers. It basically makes the rich more rich and does not let the less paid get much benefit.

3. Taking the case of two railway officers here:

a) Raman Singh-

36 years of service, currently posted as Deputy Chief Personal Officer in Railways, salary after 7^th pay hike recommendations is 1, 04,100.

Basic	96,900
TA	7,200
Total increase	12,277
Total increase in %tage	13.37
PF	-4,918
Additional taxes	-2,455
Take home increase	4,904

b) Amit Jain-

29 years of service, currently posted as Executive Engineer in Railways, salary after 7^th pay hike recommendations is 89,540.

Basic	82,340
TA	7,200
Total increase	12,840
Total increase in %tage	16.74
PF	-4,290
Additional taxes	-2,600
Take home increase	6,050

Both of them were unhappy with the increase and said that as stated by the recommendations. The increase was supposed to be 23% which makes it 15-20% for the take home increase which unfortunately didn’t happen.

4. The Minimum wage demanded by the employee unions of the central government is 26,000 but based on the 7^th Pay Recommendation, the minimum wage approved by the government is only 18,000.

How does 7^th Pay Commission affect Indian Economy?

In order to boost the consumption of Indian economy 7^th Pay Commission was announced. Moreover 7^th Pay Commission also leads to higher Gross Domestic Product (GDP) growth. “The pay hike of nearly Rs 1 lakh crore for government employees will give a strong boost to the consumer demand and help uplift the growth of the economy,” said A Didar Singh, secretary general, FICCI. It is expected to accomplish the GDP growth target much rapidly. Automobile and consumer durables sectors will have much higher demand than before. It can be easily predicted that the demand for premium product will increase many-folds, and we can expect the coming of new-generation technology in the country.

The rise in salaries will surely effect in aggregating demand in the economy. More cash with people means there will be more demand. For this reason the demands for cars and houses will result in banks to lend more money. More money will increase the savings. Altogether it will also result in inflationary pressure. Additionally consumption, industrial sector growth, credit limits etc. can be unswervingly connected with hike in salaries.

Consumption driven inflation

Hike in salary → more consumption → More Demand → Increase in supply → Increase in production → Value of good produced will increase with or without inflation

Savings

Hike in salary → People save more → Time Deposit → Lend more to business → Business expand → Increase in employment → more consumption → More Demand → Increase in supply → Increase in production → Value of good produced will increase with or without Inflation

As a result 7^th Pay commission is not only limited to government employees but also the private sector employees will gain.

Considering the previous year affects, the real estate market is expected to rise in a similar fashion as after 6^th pay commission. Property market is in slowdown phase as prices have fallen down with implementation of 7^th pay commission recommendations. In addition to this both Gold and Stock market are up these days and only the real estate market is on down. Transaction and investment in real estate sector will increase. Moreover it will flush the liquidity by augmenting the purchasing capacity of Indians.

Personal views on 7^th pay commission recommendations

1. The seventh pay hike will have a positive effect on the growth of consumption and also on the stock market. With the growing demand for luxury goods and services, it will increase the demand for discretionary products (durable goods, leisure, apparel and entertainment).
2. Retail and real estate (DLF), stocks of companies such as Mahindra and Mahindra, Nerolac, HeroMotocop, PC Jeweller will increase significantly.
3. We feel, there should be separate pay hike recommendations and schemes for different sectors. This will eliminate the disparity and unequal divisions among different classes and sectors in public sector (military and civil, class three and class one officers).
4. In the committee formed to look after the pay commission recommendations and decide the hike, there should be representatives from different sectors. Seeing the dissatisfaction among military, government should have representatives from all the three armed forces along with representatives from civil services including IAS, IPS, IFS, IRS and other significant services.
5. The 7^th pay commission will have a positive effect on inflation. As it is going to generate demand of products, it will increase the money supply in the economy which will increase inflation. Money in hand with the people will definitely help India develop and boost its economy. The increase of resources and supply over time will eventually reduce the inflation.
6. As, people will get a salary hike, there are chances that more people will opt for government sector and thus the public sector economy will see growth in future years. It can compete with the increasing private sector culture.
7. As the household income will expand, there will be increased savings. The salary hike will indirectly benefit the government as the tax revenues will go up. The size of economy will increase as the extra money comes back into the system. At the same time, government’s fiscal deficit may go up slightly to accommodate the pension payments and increased salaries.