Published On: Sat, Dec 12th, 2015

Economists fear pay commission may spike inflation

New Delhi: Economists see little risk of a surge in inflation after implementation of Seventh pay commission report to hike 23.55 per cent salary and pension of 50 lakh central government employees and 52 lakh pensioners .

Arun Jaitley

Finance Minister Arun Jaitley said the impact of implementing the pay commission’s recommendations, which will result in an additional annual burden of Rs 1.02 lakh crore on exchequer.

Their fear is warranted as the Seventh pay commission recommendations, which proposes to increase salary of central government employees, is likely to be implemented in the upcoming fiscal year, could boost inflation.

They also think that fiscal burden of Rs 1.02 lakh crore would further hamper the government’s ability to push capital expenditure due to the higher salary outgo. Already, the government spending, though has picked up in recent months, hasn’t been sufficient to provide a major investment boost to a struggling economy.

The pay commission recommendations will also have a bearing on the salaries of the state government staff.

The minimum government salary will now be Rs 18,000 and the maximum salary Rs 2.5 lakh. The maximum will be 14 times the minimum salary and there will be a huge gap between the highest and the lowest. The minimum salary will still be more than double of the minimum wage in the country.

However, it will help revive the consumer demand, especially in urban areas.

So quite understandably, the central government employees and state governments employees are happy. Pay increase will enable them to increase their consumption and meet some of their unmet demand.

At the same time, there is a widespread fear that the pay commission recommendations are likely to increase inflation which will reduce the purchasing power of money.

Depending on the magnitude of the increase of inflation, the government employees may or may not sustain their current living standard by using the augmented income received under the Seventh pay commission recommendations.

But definitely the others who are not employed by the government are going to suffer a loss of their living standard if the pay commission recommendations really prompt high inflation.

Since the most of the people of the country earn their living from the non-government sector, the pay commission recommendations may become national welfare reducer in the end.

Against the above backdrop, the most important question is how inevitable high inflation is as an outcome of the implementation of the pay commission recommendations.

Honestly speaking, there is no clear economic reason for the pay commission recommendations to push the inflation up. But in developing countries, many economic things arise out of non-economic factors.

In many cases the non-economic factors dominate over the economic factors resulting in outcomes which are nonsensical from economic point of view. Therefore, the apprehension of high inflation as an outcome of the implementation of the pay commission recommendations cannot be shrugged-off.

Many economists argue in media that the pay commission recommendations will increase the money supply and hence fuel the inflation.

Finance Minister Arun Jaitley said the impact of implementing the pay commission’s recommendations, which will result in an additional annual burden of Rs 1.02 lakh crore on exchequer, would last for two to three years.

The Minister assured that he was not worried about fiscal deficit and government would be able to meet its target despite additional outgo towards the implementation of the Seventh Pay Commission.

RBI Governor Raghuram Rajan also said the Seventh Pay Commission recommendations will not upset fiscal maths as additional expenditures will be offset by either surplus revenues or expenditure cuts.

TST

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