The Union cabinet approved on Wednesday a big jump in salaries of central government staff and similar raises in pensions that will benefit some 10 million people.
The new salaries and pensions will be effective from January 1, 2016, finance minister Arun Jaitley said.
For junior employees, the hike in basic pay will be 14.27%, which means Rs 18,000 would be the minimum pay of an employee on the central government’s rolls.
More cash in hand is likely to result in higher consumption by the government’s massive employee base, which accounts for a large segment of the Indian middle-class. More demand could boost the economy through higher spending on assets such as cars and housing.
“When you spend there is taxation, demand is also generated. When you save that, savings is used in development of the country. It also has some inflationary pressure,” finance minister Arun Jaitley said.
“So the extra money also comes back into the system which increases size of economy,” he said.
The cabinet approval takes in the report of the 7th Pay Commission that had recommended in November an average 23.55% hike in salaries, allowances and pensions of more than 4.7 million central government employees and 5.3 million pensioners, of which 1.4 million employees and 1.8 million pensioners are from the defence forces.
The government has, however, deferred a decision on the revised allowances suggested by the pay panel, which favoured abolishing 52 such perks such as “hair cutting” allowances. A panel headed by the finance secretary will examine these recommendations before a final decision on allowances are taken. Till such time, the existing allowances will continue, Jaitley said.
According to Jaitley, excluding the payment on allowances, the total outgo during this year, including arrears from January 1, 2016, will be Rs 84,933 crore in 2016-17. Of this Rs 60,608 crore will be borne from the general budget, while Rs 24,325 crore will be borne from the railway budget.
Jaitley said the government intends to pay arrears for six months within the course of this year.
Trade unions, including the RSS-affiliated Bharatiya Majdoor Sangh (BMS), rejected the pay hikes and threatened to strike work.
“The government has disappointed us by ignoring the objections raised by employees. This will lead to industrial unrest for which the government will be responsible,” BMS general secretary Virjesh Upadhyay said in a statement.
According to the revised scales, a fresh IAS recruit will get a salary of Rs 56,100 a month against a base salary of Rs 23,000 now, while a new recruit at the lowest level will get Rs 18,000 a month from the earlier base salary of Rs 7,000. Employees, in addition to base salaries, are paid dearness allowance (DA) and house rent among many other allowances. The DA component progressively rises every six months to factor in inflation rates.
“Government salaries have to come to a respectable level so that it can attract the best talent,” Jaitley said.
“There is an existing provision. Once we take a decision on allowances ... there will be more money in the market ... It will also generate more demand.”
But the extra money could blow a bigger hole in public finances, push inflation up and possibly squeeze elbow room for an interest rate cut by the new Reserve Bank of India (RBI) governor.
The decision will also likely have a cascading impact as states normally follow the Centre’s lead in revising salaries.