EFFECTS OF SIXTH PAY COMMISSION ON THE ECONOMY

The Union Cabinet on Thursday approved the recommendations of the Sixth Pay Commission thereby paving the way for higher wages for government employees.

"The cabinet has approved the pay commission report," Law Minister Hansraj Bhardwaj told reporters after a cabinet meeting.

The pay panel made its recommendations earlier in 2008 for salary increases for central government workers costing Rs 12561 crore ($2.9 billion) for the fiscal year 2008/09, plus Rs 18060 crore rupees in backpay to January 2006.

The cabinet set up a team of top civil servants to examine the recommendations.

Some analysts say the wage increases could derail govt's moves to tidy up its public finances and widen the federal fiscal deficit, which the government aims to limit to 2.5 per cent of gross domestic product in 2008/09, down from 3.1 per cent in 2007/08.

Another government panel said on Wednesday the budget deficit target for 2008/09 would be exceeded and serious fiscal risks were arising from growing off-budget liabilities estimated at 5 per cent of GDP.

The pay round comes roughly once a decade and the previous one in 1997 raised salaries for federal employees by nearly 40 percent, prompting many state governments to follow suit and blowing the combined state and federal deficit to nearly 10 per cent of GDP.

India is battling inflation of 12 per cent but economists said the pay round was unlikely to give prices a significant boost.

Highlights

1. Minimum wages to be Rs 10,000 per month.

2. 45 lakh employees to benefit from this hike which would take effect from January 2006

3 It will be paid in two installments: 40 % in FY 09 and rest 60% in FY 10.

 

Source : The Economic Times

 

The Negatives:

An already stretched Fiscal Deficit could worsen further, giving rise to downgrades by international rating agencies. However the Government could try to manage the situation by means like increased revenue from spectrum sale to telecom companies and by divestment of shares in PSU's to the public. Both these measures are on the anvil and could help the Government in bridging the gap between revenue and expenditure.

 

Inflation fires could be further stoked by more disposable income in the hands of the people. This should be more worrisome to a Government already battling high inflation and could lead to further tightening of liquidity by RBI.

 

The Positives:

More money in the hands of the people would result in more spending in malls and retail outlets, thereby giving a push to slagging demand in consumer durables and two wheelers.

 

Quality of employees in the public sector and administration would hopefully improve, because of higher pay packets. Public sector units would be able to better incentivise their employees and could hope to retain outperformers. The armed forces, which are facing a shortage of middle level personnel would be better placed to hire capable junior officers and other staff.