The Seventh Pay Commission will likely submit its report on Friday, recommending higher salaries for nearly 4.8 million central government employees and 5.4 million pensioners. Sources indicated that panel, headed by former Supreme Court judge Justice Ashok Kumar Mathur, will likely recommend an average 15% hike in salaries.
But will higher salaries prompt people to spend more on cars and houses, triggering a cycle of spending and investment?
With the economic revival still wobbly, policymakers and economists will be keenly watching the fiscal and expansionary impact of the Seventh Pay Commission’s payouts to nearly 10 million central government employees and pensioners.
While there are scattered signs of consumption demand picking up, India’s economy seemed to be sputtering with latest industrial output data suggesting that factories are not producing goods and people are not buying at a pace fast enough to push growth.
Industrial output growth fell to a four-month low of 3.6% in September, pulled down by a muted manufacturing and consumer non-durables sectors.
Passenger vehicle sales have grown 6.22% during April-September, while sales of two-wheelers have declined 0.36%.
Reserve Bank of India (RBI) governor Raghuram Rajan has also placed his bets firmly on the Seventh Pay Commission’s handouts to boost spending and push up “aggregate demand”.
The last such comprehensive payout did prompt people to spend more on goods. Passenger vehicle sales, for instance, recorded a sharp rise in sales shortly after the Sixth Pay Commission payouts that came into effect from January 1, 2006. Sales rose nearly 20% in 2008-09 and by 22% the next year. Part of the sales spike was driven by the arrears that employees received as the new salaries were notified in 2008, entitling them to an accumulated past dues of over two years.
According to some estimates, a 15% salary hike could push up the government’s wage bill by Rs 25,000 crore, or about 0.2% of India’s GDP. The last salary revision cost the government an extra Rs 17,000 crore annually. The employees also got one-off arrear payments of about Rs 27,000 crore, driving up spending on assets.