The government has announced the formation of the 8th Pay Commission to review the pay scales of its employees. With the economy at a critical juncture, a hike in their salaries will help boost consumption and put the economy into a higher growth trajectory, explains Lekha Chakraborty.
A helping hand to drive economic recovery
This is a crucial announcement by the government, meant to convey the message that India will not get into “fiscal austerity mode” by staggering the salaries and pensions amidst the global fiscal crisis and mounting global debt burden. This is a bold move to boost consumption amidst mounting global inflation and sluggish economic growth.
After the global financial crisis, India could withstand the aftermath effects mainly due to the timely announcement of Pay Commission (PC) hikes and the employment guarantee schemes then. The revisions in salaries and pensions are much awaited to increase disposable income in the hands of the people. Private investment has been shy (though India has been consistent about capex spending), primarily due to uncertainties about consumer demand in the post-pandemic period. A significant way to boost consumption is to increase salaries and wages. It is also important to support the employees by providing them emoluments to fight mounting inflation.
Genesis of Pay Commissions
The Pay Commission in India was established to review and recommend changes to the salary structure of government employees, to provide a fair and equitable pay scale to improve the wellbeing of the employees to tackle the inflationary pressures. The first PC was set up in 1946, just before India gained independence. It aimed to standardise pay scales and allowances for central government employees. Since then, seven more PCs have been constituted in India. The 6th PC (2006) recommended a significant increase in pay and allowances, against the backdrop of widening wage gaps between public and private sectors in a globalised India. The 7th PC (2015) recommended a 14.29% increase in basic pay, and introduced a new pay matrix system. The 7th PC announcements generated concerns from the Armed Forces, and hopefully the 8th PC will take into consideration these concerns.
Intended beneficiaries of the PC recommendations
The intended beneficiaries of the PC recommendations are government employees including civil servants – including those working in various ministries, departments, and public sector undertakings; pensioners, and family pensioners. The PC aims to review and recommend changes to their salary structure, allowances, and other benefits. It is estimated that there are around 4.7 million central government employees and 6.5 million pensioners. Out of this, 1.4 million employees and 1.9 million pensioners belong to the defence forces. Applying a “gender lens” to PC recommendations by introducing two years child care leave was a landmark announcement. The “compassionate care leave” benefits for employees to attend to close ailing relative(s) up to six months in discrete or in continuum is a much awaited policy announcement, against the backdrop of demographic transition and rising elderly population in India. The fiscal costs of demographic transition are huge, and gender-neutral “compassionate care leave” benefits can be a cost-effective fiscal announcement.
Isn’t DA or annual increments enough?
Economic growth has cyclical and structural components. The counter-cyclical short-term fiscal measures do not result in economic growth recovery process and boost demand. A PC should be pitched as a structural reform. At this juncture, India requires structural reforms for sustained economic growth recovery and boost demand, beyond the regular Dearness Allowance (DA) and annual increments for ad hoc inflation adjustments. The 8th PC is expected to bring in the structural reforms, reflecting the new challenges in the labour market and living conditions including the challenges from Artificial Intelligence and to ensure pay parity and equity against the global economic headwinds. It is also expected to modernise the pay structures in India, to retain the best talents within India.
The PCs conduct comprehensive cost of living reviews, recommend location-specific allowances, and ensure competitive salaries to prevent “brain drain”. This structural reform is imminent, despite the fiscal space constraints, to bring in growth with equity. On the other hand, the fiscal austerity measures will affect Indian growth story negatively, given the Viksit Bharat 2047 roadmap. The Viksit Bharat 2047 Roadmap is not exclusively about capex, it is also about boosting consumer confidence, by increasing the disposable income in the hands of people, and live with dignity with high salaries and wages.
Compensation package of govt staff & CPSE staff
The basic compensation package for government employees in India typically comprises basic pay, dearness allowance (DA), house rent allowance (HRA), transport allowance (TA), and other allowances besides pension. In contrast, Central Public Sector Enterprises (CPSE) staff enjoy a more comprehensive package, including basic pay, DA, HRA, performance-related pay (PRP), perks like company accommodation and vehicles, and retirement benefits such as gratuity and pension. The CPSE staff often receive higher salaries and perks. Retirement benefits may differ between government and CPSE staff, highlighting the variations in compensation packages across different government departments, ministries, and CPSEs.
Do state governments invariably follow central PCs?
State governments often, but not invariably, follow the recommendations of Central Pay Commissions (CPCs). While some states such as Maharashtra and Gujarat adopt the CPC’s recommendations with minor modifications, others such as Tamil Nadu and Kerala may make significant changes or even establish their own PCs. This is because states want to maintain fiscal autonomy, and make decisions integrating state-specific concerns about salary structures, allowances, and pensions.
For instance, Maharashtra has its own PC, which has recommended distinct pay scales and allowances for state government employees. Similarly, Tamil Nadu has implemented its own PC recommendations, providing higher salaries and allowances to its employees compared to the central government. By having their own PCs, state governments can have tailor-made payment packages.
Pay and pension expenditure trends
The government’s pay and pension expenditure has undergone major changes over the decades. With the implementation of the 7th Pay Commission and One Rank One Pension (OROP) for defence pensions in 2016-17, the revenue expenditure increased significantly. Pension payments have been rising steadily, with the States’ expenditure on pensions increasing from 0.6% of GDP in the early 1990s to 1.7% of GDP in 2022-23. In the 2023-24 Budget, pension payments were estimated to be Rs 2.34 lakh crore, accounting for 0.8% of the estimated GDP. The Centre’s total expenditure is expected to increase by 7.5% in 2023-24, reaching Rs 45.03 lakh crore.
Share of salary/pension bill in current total/revenue expenditure
The Union Budget 2024-25 figures revealed that out of the total budget of Rs 48.21 lakh crore, pension constituted Rs 2.43 lakh crore (5.04%) and salaries Rs 1.62 lakh crore (3.36%). The interest payment is way high at Rs 11.63 lakh crore (24.12%). The latest RBI report on State finances showed that expenditure on salaries and wages of States is 3.1% of GDP as per 2024-25 (BE). The RBI report stated that “as a part of transparency measures, a few States have legislated the disclosure of estimated pension liabilities for the next ten years worked out on an actuarial basis to assess their likely pension burden, mode of financing and impact on deficit indicators”. The latest RBI report on State Finances figures revealed that the pension expenditure as a percentage of total revenue expenditure is 11.9% in 2024-25(BE) for all States and UTs together.
Impact of Unified Pension Scheme
The Unified Pension Scheme’s (UPS) aim to merge various pension schemes, including the National Pension System (NPS), will add complexity as it will require significant changes to the existing pension framework. The commission will need to consider the implications of the UPS on the overall compensation structure. This will require the 8th PC to balance the government’s fiscal space with the aspirations of employees and pensioners, making its recommendations even more challenging.
Factors that 8th PC will need to keep in mind?
Fiscal space is an important concern. However, the fiscal multipliers of pensions and salaries to boost the economy through strengthening the aggregate demand is likely to be higher. The citizens vote for a party in retrospect analysing the policies by the government. Mounting inflation is yet another determinant. Given the challenges from digitalisation, big data and AI, the commission needs to take a calibrated approach to enhance the wellbeing of citizens. Finally, low salaries and wages are prime reasons for corruption in the public sector.
The writer is professor, NIPFP, and member, Governing Board, IIPF Munich
