The 23.5% average hike in the central government employees’ salaries could press on the government’s wage bill by an estimated Rs 1.02 lakh crore in 2016-17, pushing up the government’s fiscal deficit by 0.65% of gross domestic product (GDP).
Out of the total financial impact, Rs73,650 crore will be borne by the General Budget and Rs 28,450 crore by the railway budget.
In percentage terms, the overall increase in pay and allowances and pensions over the ‘Business As Usual’ scenario will be 23.55%. Within this, the increase in pay will be 16%. Allowances will go up by 63%, and the pension bill will increase by 24%, the pay commission report said.
The total impact of the Commission’s recommendations are expected to entail an increase of 0.65 percentage points to GDP compared to 0.77% in case of the sixth pay commission, the finance ministry said.
While the government will spend Rs39,100 crore more in “pay” from Rs2,44,300 crore to Rs2,83,400 crore, “allowances” will account for an additional Rs12,100 crore outgo to Rs36,400 crore from Rs24,300 crore.
The pension bill will go up by Rs33,700 crore in 2016-17 from the current Rs142,600 crore.
The government would like to contain the fiscal deficit—a measure of how much the government borrows to fund its expenses—within manageable limits.
In recent years, India’s precarious public finances have attracted unsparing criticism from global credit rating agencies amid a looming risk of downgrade of sovereign ratings.
Analysts are keenly watching on the how the government manages its public finances in wake of the off-budget expenses such as those relating to one-rank-one-pension (OROP) scheme for defence personnel as also the expected 7th pay commission payouts.
Unlike previous years, the pay commission-recommended salary hikes this time will not carry a major “arrears” burden given as it will be implemented on a “current” basis and not retrospectively. The new salaries will come into effect from January 1, 2016. The previous three commissions worsened the government’s finances.
The sixth pay commission recommended salaries, which was notified 2008-09 but kicked in retrospectively from January 1, 2006, saw pay cheques get bigger by an average 35%, costing the government an extra Rs17,000 crore annually. The employees also got one-off arrear payments of about Rs27,000 crore.
The arrears were paid in two instalments: 40% in 2008-09 and 60% in 2009-10, which spread the fiscal impact.
A 20% hike in salaries will likely push up the fiscal deficit by 0.34% of GDP in 2017-18 and by 0.24% of GDP the following year.
India has budgeted to contain fiscal deficit to 3.9% of GDP in 2015-16 and further reduce it to 3% of GDP by 2017-18.
“The fiscal impact of the seventh pay commission, as with the previous ones, will likely be felt over the next two years: 2016-17 and 2017-18,” Sonal Varma, of Nomura, a broking and research firm, said in a research report.
Earlier on Thursday, finance minister Arun Jaitley said that implementation of the 7th pay commission recommendations will put “slight” burden on the state’s expenditure.
“I am conscious of the fact that 55% of all your expenditure is a tied up expenditure. And probably with the pay commission submitting its report today your percentage will slightly increase for the time being,” Jaitley said in Jaipur at the Resurgent Rajasthan Partnership Summit 2015.