The cabinet’s decision to get more generous than the Sixth Pay Commission and dole out a bigger-than-recommended salary hike to the central government's 5 million employees is not surprising. But it is surely worrying.
Coming as it does when the inflation rate has already crossed 12 per cent, Thursday’s announcement will only give a fillip to inflationary forces.
There's no getting away from the fact that some Rs 12,000 crore, to be paid in the first tranche of arrears before Dussehra or Diwali, will add to the money available for spending by consumers. This is about 70 per cent of the funds the RBI recently sought to suck out from the system by increasing the cash reserve ratio – the share of deposits that commercial banks have to park with it.
Worse, in an election year, states will soon join the bandwagon and hike salaries of the 13 million odd they employ. A separate panel has also suggested hefty increases in public sector employees salaries.
As government babus hit the shopping floor with their pay bonanza, they would be undoing much of the RBI's efforts to rein in inflation.
Finance Minister P. Chidambaram, however, maintained that “the impact on inflation was already factored in.”
But only hours after he made the comment, price data from the government showed inflation had touched 12.4 per cent in the week ended August 2, up from 12 per cent a week earlier.
There are bigger concerns over fiscal slippages.
“The Centre’s fiscal deficit would go up by 0.5 per cent of gross domestic product,” said D.K.Joshi, economist at credit rating agency Crisil.
Just this week, the prime minister’s economic advisory council warned that states faced a “major fiscal risk” arising from possible pay revisions. The last pay revision in 1997 entailed an additional expenditure of about 1.5 per cent of GDP at the state level.
According to Rajya Sabha member N.K. Singh, also a former revenue secretary, the fiscal situation is getting as bad as it was in 1991, that forced the government to mortgage gold and seek a bailout from the IMF.