By Ruma Dubey

Diwali has come a bit late for the Central Government employees. The Govt today announced the Seventh Pay Commission and there is a lot to cheer for. A quick look at what the Pay commission has put forth:

• Minimum Pay recommended at Rs.18,000 per month, up from current Rs.7,000.
• Maximum Pay has gone up to Rs.2,25,000 per month for Apex Scale and Rs.2,50,000 per month for Cabinet Secretary and others presently at the same pay level.
• This is expected to be recommended by 1^st Jan 2016.
• It will benefit 47 lakh central government employees and 52 lakh pensioners.
• The impact on the Govt’s Budget - Rs 73,650 crore and the Railway Budget by Rs 28,450 crore.
• For the first time, introduced a health insurance scheme for staff and pensioners.
• Doubled gratuity ceiling to Rs.20 lakh.
• The total impact of the Commission’s recommendations are expected to entail an increase of 0.65% points in the ratio of expenditure on (Pay+Allowances+ Pension) to GDP compared to 0.77% of Sixth Pay Commission.
• Staff pay is adjusted for inflation every six months through the so-called dearness allowance, fixed salaries are revised once in about 10 years.

There are various other recommendations; after all it is a very detailed 900-page document. This is good news for the Govt employees but for the Govt itself, it could mean that it puts a question mark of the Finance Minister’s ability to meet the fiscal deficit target of 3.5% of GDP. This pay hike will put more money in the hands of people with no real increase in supply – today’s statement by Rajan, expressing his worry over no increase in public and private investments in the country, is a pointer to this very same fact. But the demand-supply mismatch means that we could be staring hard at retail inflation or CPI going up pretty dramatically.

It is usually seen that when Pay Commission hikes salaries, demand for cars, two-wheelers, electronics and consumer durable usually perks up. Thus if implemented in Jan 2016, all the companies in these sectors could have a much better Q4 performance.

The fiscal impact will be there, irrespective of the Govt saying that it is nothing to worry about. The impact will be spread over the next two fiscals – FY17 and FY18 as this is an additional expenditure and the Govt has not exactly been able to meet its divestment targets yet. Not to forget, there is the burden of One-Rank-One-Pension (OPRP) too which will have to be accounted for. So where is the money going to come in for the expenses that the Govt will now have to pay for?

The divestment target was set for Rs.69,500 crore and as most of the PSUs in the list were pure commodity stocks; given the low price of commodities, time was simply not on the side of the Govt. Till date, the Govt has managed to sell stakes in four PSUs – Power Finance Corp, Rural Electrification, Indian Oil and Dredging Corp – raising Rs.12,600 crore, which is 18% of the total FY16 target. With some 51/2 months to go before the fiscal ends, hopefully, Coal India stake sale, if the Union allows it to happen, will help bridge the gap.

The Govt is expecting most of the money to come from the indirect and direct tax revenues. Somehow, in this context, when Jaitley said last week that he will look at reducing corporate tax to a flat rate of 25% over the next 3-4 years, one could not help but wonder whether the salaried class would be burdened further. As such we will now be paying 0.5% more on service tax under the name of Swachh Bharat.

Well, lets see where this takes us all. The boat has set sailing…