The Sixth Pay Commission will be a fiscal burden. But surely, it will improve India’s growth, right?
The Union Cabinet’s decision to better the recommendations of the Sixth Pay Commission is bound to gladden the hearts of 5 million central government employees. The hike in salaries by an average of 21 per cent will, no doubt, be welcome as inflation is currently in double-digits and is rapidly eroding the incomes of the salaried class. At a time when the government’s finances are under severe strain, this bonanza entails a whopping additional burden of Rs 42,762 crore on the exchequer. Revising the wages and retirement benefits of central government employees is, in turn, bound to lead to demands for parity from state government employees.
Obviously, politics has trumped economic considerations in weighing on the Cabinet’s decision to raise salaries of central government employees. As important state elections, including a national one in May 2009, draw closer, most governments cannot resist the temptation to loosen the fiscal purse strings to shore up their political fortunes. The fiscal consequences of such measures will obviously have to be borne by the new government at the Centre. Cynics would, no doubt, argue that this move would only stoke inflationary fires as the payment of arrears by Diwali will boost consumer spending. There are also dark hints that this represents a fiscal burden the government can ill-afford to take on.
But a more optimistic reckoning is that this ‘Pay Day’ is bound to favourably impact the economy’s growth rate. After all, didn’t India’s GDP growth rise in the years following the earlier Fifth Pay Commission during the late 1990s? According to national income conventions, the contribution of non-marketed services is estimated according to cost. So giving more wages to babus jacks up the growth rate of public administration and defence and thereby overall growth. The upshot is that while the fiscal deficit — that reflects the government’s borrowings — will, no doubt, rise due to the Sixth Pay Commission award, so too will our economic performance, an outcome that will surely be welcome as India’s growth is flagging of late.