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Pay hike to toughen war on inflation

The Rs 29,000-crore bonanza in pay arrears may have cheered the five million central government employees across the country, but it would surely make a dent on government finances and add to difficulties in battling inflation.

business Updated: Aug 14, 2008 20:58 IST
HT Correspondent

The Rs 29,000-crore bonanza in pay arrears may have cheered the five million central government employees across the country, but it would surely make a dent on government finances and add to difficulties in battling inflation.

The Cabinet’s decision on Thursday to accept and improvise on the recommendation of the Sixth Pay Commission would push up the annual salary bill of the central government by Rs 17,798 crore, besides a two-phase payment of arrears totalling Rs 29,376 crore.

The first tranche of arrears is expected before Diwali and amount to Rs 11,747 crore, almost 71 per cent of the money the Reserve Bank of India (RBI) recently sought to suck out of the system, in a bid to fight inflation, which has already touched a worrisome 12.44 per cent.

The RBI has raised the cash reserve ratio — the mandatory proportion of money banks have to park with the central bank —by 0.5 percentage points to 9 per cent to suck out about Rs 16,500 crore from the system to contain the runaway price line.

Finance Minister P. Chidambaram said the budget deficit targets for 2008-09 would be adhered to and the new scales have already been factored in during the preparation of Budget 2008-09.

The impact of the pay revision dole out on the central budget will be Rs 15,717 crore and Rs 6,414 crore on the railway budget for 2008-09.

Fiscal deficit for 2008-09 has been budgeted at 2.5 per cent of gross domestic product (GDP) in 2008-09.

Analysts, however, said the pay revision payout would have a bearing on the fiscal deficit. “The deficit would go up by 0.5 per cent because of the pay revision,” said D.K. Joshi, principal economist of credit rating and consulting firm Crisil.

It could also adversely affect state government finances as most of them are expected to follow suit.

“A major fiscal risk for the states in the immediate future arises from possible pay revisions in the wake of the Sixth Central Pay Commission,” the Prime Minister’s Economic Advisory Council (EAC) said in its recent report.

The last pay revision entailed an additional expenditure of about 1.5 per cent of GDP at the State level.

Analysts, however, believed that many states are better placed to absorb the fiscal impact of a pay revision.
“At present, many states are running a revenue surplus and are fiscally sound health,” said Joshi.

“Since the fiscal deficit is at an all time high, the fiscal pressures would be greatly aggravated. The government would have to initiate and closely monitor serious austerity and belt-tightening measures,” Federation of Indian Chambers of Commerce and Industry Secretary General Amit Mitra said.