Starting this month, over 5 million government employees will get pay rises. The Sixth Pay Commission recommendations have been implemented with some revisions and the average pay rise is 21 per cent across the board, with retrospective effect from January 2006.

Published in Outlook Money (http://www.outlookmoney.com/olmnew/article.aspx?sid=10&cid=75&articleid=7765)

Starting this month, over 5 million government employees will get pay rises. The Sixth Pay Commission recommendations have been implemented with some revisions and the average pay rise is 21 per cent across the board, with retrospective effect from January 2006. The government has decided to pay 40 per cent of the arrears in this financial year and 60 per cent in the next. 

Ten years ago, the Fifth Pay Commission recomm-endations led to around 90 per cent rise in government salary and pension expenditure over four years. The extra expenditure could not be recovered through extra revenue sources and this resulted in heavy government debt burden. The World Bank called it “the single-largest adverse shock” to government finances as Budget deficits soared for Central and State governments. So, when the Sixth Pay Commission was set up, apprehensions about the impact on government finances were rife. 

However, India has changed since the 90s. The current economic environment is significantly different. India has had an unprecedented run of three years of 9 per cent plus growth. In the past five years, inflation has averaged 5.1 per cent, while in the five years preceding the Fifth Pay Commission it averaged 9.4 per cent. A look at the numbers shows that this year the net outgo for the Central government is slated to be Rs 7,975 crore in pay rise and Rs. 7,224 crore in arrears. A total of Rs 15,199 crore, which is around 3.3 per cent of the non-plan revenue expenditure budgeted for this year. This share is relatively lower than the previous hike. In 1997-98, the extra bill in wages, salaries and pensions was around 9 per cent of the non-plan revenue expenditure. Government budgets are also now in much better shape compared to the late 90s, with considerable reforms since 2002-03. Tax revenues are buoyant, there have been changes in tax systems and there has been a structural change, with the services sector booming. So, though there will be a strain on the government to adjust its finances, the impact will not necessarily be as big as it was the last time. 

For the 5 million employees, however, this revision was long overdue and is welcome as inflation has been eating into household budgets recently. The high growth and low inflation years have led to a consumer boom and expectations of quality life are quite different from the 90s. While the savings rate of households has gone up, there has been a change in the saving pattern with physical assets playing a larger role in this decade than in the 90s. 

How would consumers allot the money from the windfall? Rough calculations indicate that, given an average savings rate of about 28 per cent for households in these income brackets, an employee will get around Rs 22,000 extra. While part of this increase will go back to the government in taxes, the amount for each employee would vary, depending on the level of income and extent of pay rise. Moreover, preferences on how to spend this extra income will be dictated by household necessities and tastes. Consumers usually spend first on home improvement, then come consumer durables. For government employees and for these market segments, this expenditure will be a boost. 

The Pay Commission has also recommended various administrative reforms, but many have not been taken up by the government. Needless to say, improving efficiency is an imperative. Interestingly, an XLRI survey on government employees showed that less than 40 per cent felt that the pay structure ensures efficiency. This must change. While pay revisions are necessary, it is important to raise the perception in society that the government is an asset, not a constraint, towards a better future.

The author is chief economist at Indicus Analytics and can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it