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The real cost of the 7th Pay Commission bonanza

The 7th Pay Commission’s recommendations have come into force in several stages, starting with the pay and pension benefits of 3 million central government employees (those who work directly under different ministries) on 1 January 2016. Allowances for these central government employees were hiked from 1 July 2017 onwards. However, actual disbursal of the new salaries began much later and arrears (though not all) were paid. Employees of autonomous and educational institutions have only recently started receiving their raised salaries. The approval of the recommendations by state governments is ongoing. In April this year, Jammu & Kashmir became the first state to approve the recommendations. Thus it will be a while before the majority of Indians – those who neither have government jobs nor well-paid corporate jobs ­– begin to feel the full impact of these salary hikes.

The 7th Pay Commission was less generous to the lower-rung government employees

But it is clear that the implementation of the 7th Pay Commission award has put strain on the Centre’s finances, forcing it to push back its fiscal consolidation target to 2020-21 from 2018-19. On the other hand, expected benefits have not been fully realized due to demonetization and the hasty roll-out of the Goods and Services Tax (GST).

The fiscal space for the Modi government has shrunk significantly after it increased the states’ share in Centre’s divisible pool of taxes from 32 per cent to 42 per cent following recommendations of the 14th Finance Commission. Meanwhile, crude oil has rallied in the global market because of supply concerns after Donald Trump withdrew from the Iran nuclear deal, paving the way for re-imposition of sanctions on Iran. Trump has also threatened sanctions on Venezuela, a major oil exporter.

A paper published by the Reserve Bank of India says the 7th Pay Commission’s recommended salary hikes have contributed significantly to the inflation

If the uptrend in the oil market continues, the Centre’s revised fiscal consolidation plan too could get derailed.

The share of Pay, Allowances and Pension (PAP) bill in Centre’s revenue expenditure has shot up to 9.18 per cent from 8.43 per cent (see Table 1). As percentage of revenue receipts, it has increased from 10.45 per cent to 10.88 per cent. Establishment expenditure and interest payment together accounted for as much as 44.4 per cent of the Centre’s budget in 2018-19 (see Table 2). Salary is a major component of the Centre’s establishment expenditure.

Table 1: Trend in PAP (Pay, Allowances and Pension) growth 

FY PAP as% of revenue receipts PAP as% of revenue expenditure
2012-13 10.23 7.6
2013-14 10.43 8.07
2014-15 10.53 8.26
2015-16 10.45 8.43
2016-17 10.88 9.18

Source: Pay Research Unit

 

Table 2: Establishment cost, interest payments in Centre’s expenditure (Rs crore)

Item 2016-17 2017-18 2018-19 (BE)
Establishment expenditure 423851 468914 508400
Interest payments 480714 530843 575975
Centre’s total expenditure 1975194 2217750 2442213

Source: Union budget

In a revised estimate for 2017-18, the Centre cut its capital expenditure by Rs 36,356 crore to Rs 2.73 lakh crore to make room for higher salary costs. Budget allocation for the education sector, as a percentage of total government expenditure, increased from 3.4 per cent in 2016-17 to 3.6 per cent in 2018-19. Similarly, the share of health sector allocation increased from 1.9 per cent in 2016-17 to 2.2 per cent in 2018-19.

Union Finance Minister Arun Jaitley said the 7th Pay Commission had made its recommendations after considering their impact on the economy

However, the budget allocation for education in 2018-19 is just 3.8 per cent higher than the revised estimate for 2017-18. The budgetary allocation for the Ministry of Human Resource Development (HRD) declined by 0.23 per cent in 2018-19 with respect to the previous year. Similarly, the budgetary allocation for health sector in 2018-19 saw just 2.7 per cent increase over the actual expenditure in 2017-18. In fact, there is a 2.1 per cent decline in the allocation for the National Health Mission, India’s largest programme for primary health infrastructure.

India spends a whopping Rs 10.18 lakh crore on the emoluments of government employees, both at the Centre and in the states – a staggering 8.15 per cent of the country’s GDP – according to a note submitted by the Department of Personnel and Training (DoPT) to a parliamentary panel. Compared to this, spending on education, health and social welfare is puny. The Committee on Estimates has found that wages and building infrastructure like offices and houses for the bureaucracy, account for a much larger chunk of the expenditure than delivery.

How much Centre spends on salaries, allowances to Category-A officers 

The seventh pay panel had actually asked the government to provide details of the total expenditure on the Indian Administrative Service (IAS), Indian Police Service (IPS) and Indian Forest Service (IFS) officers posted at the Centre and in the states and its share in the GDP. But the government evaded the request and instead submitted overall data related to all government employees without specifying services. The government in its reply stated that there was no study at hand on how much it spends on the salaries and upkeep of officers belonging to these top services. Salaries of its nearly 10 million employees account for 12.6 per cent of the central government’s total expenditure.

The government has implemented the recommendations of the 7th Pay Commission, doubling the minimum starting salary from the current Rs 7,000 per month to Rs 18,000 per month. The Commission’s recommendations added an extra 0.7 per cent burden on the GDP and an annual burden of Rs 1.02 lakh crore.

Inflationary pressure

The increase in house rent allowance (HRA) for central government employees in accordance with the recommendations of the 7th Pay Commission (CPC) has had a peak impact on the Consumer Price Index (CPI) inflation of nearly 35 basis points, according to a research paper by RBI’s monetary policy department. The revised HRA structure came into place in July 2017. “Ex-post analysis of CPI shows that the 7th CPC’s HRA increase pushed up headline inflation prints gradually from July 2017, with a peak impact of about 35 basis points (bps),” said the research paper titled “Impact of Increase in House Rent Allowance on CPI Inflation”.

Prices of daily necessities have soared

It said while some states have implemented similar revisions in pay and allowances for their employees, the impact had not shown up in the data due to reasons like administrative delays in the actual disbursals and partial disbursals. “Even if disbursements have been made, the representation of state government houses in the sample of dwellings may not be adequate to capture the impact,” it added.

In keeping with the recommendation of the 7th Pay Commission, the basic salaries of government employees rose by a factor of 2.57 and consequently, HRA stood revised by 105.6 per cent. Housing is a major component in CPI with a weight of 10.07 per cent. Within housing, the weight of house rent is 9.51 per cent and that of other miscellaneous housing services 0.56 per cent.

Lower-rung employees get a raw deal

The seventh pay panel has accorded a slightly higher index of rationalization at the level of Senior Administrative Grade and above, while leaving those at the bottom of the pyramid disappointed. The pay panel had acted on the premise that at lower levels,salaries in government jobs are higher than in the private sector. These are understood to be Group C employees – those providing assistance – which constitute 88.7 per cent of all employees and have a relatively large Dalitbahujan (SC, ST and OBC) representation compared to Group A or Group B. For example, a general helper – lowest ranked employee in the government – earns Rs 22,579 per month. They would earn around Rs 9,000 if he were employed by a private entity.

But in the highest echelons of the government, the compensation is nowhere comparable to their counterparts in the private and public sector, argued the panel. These are Group A employees, who constitute 2.8% of all employees.

There are 18 pay scales that decide an employee’s Basic Pay (BP). The lowest pay is Rs 18000 (Level 1) and the highest, for Cabinet Secretary, is Rs 250,000 (Level 18).

Finance Minister defends pay panel’s recommendations

In a written reply to a question in the Rajya Sabha, Union Finance Minister Arun Jaitley said that while making its recommendations the 7th Pay Commission had duly taken into account the likely financial impact of its recommendations on the ratio of expenditure on PAP to gross domestic product (GDP) and the fiscal deficit target.

The commission had estimated 0.65 per cent increase in the proportion of PAP in the GDP in 2016-17 as a result of implementation of its recommendations, Jaitley said, adding that the total impact of its award was less than that of the 6th Pay Commission.

“The Commission has, therefore expressed the view that this represents an extremely reasonable increase in PAP-GDP ratio in the initial year of the award and has felt that the macroeconomic impact of its recommendations is in conformity with the need for fiscal prudence and macroeconomic stability,” Jaitley said.

But real-life data tells a different story. Government’s capital expenditure budget is getting the short shrift as the bulk of its revenue goes towards meeting salary, pension and interest payments. The Centre’s capital expenditure budget saw a modest annual growth of 7 per cent from 2016-17 to 2018-19 despite the fact that Rs 5 lakh crore of extra revenue was mopped up via excise, customs duty on the petroleum sector during the period.

That means tax payers’ money is increasingly being used to meet government’s operational expenses and not to finance construction of roads, highways, bridges, ports, airports and railway infrastructure. This trend could hurt the productive capacity of the economy and make job creation even more difficult.


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