7th Pay Commission

7th Pay Commission implemented by the Government recently has cleared the arrears of its employees. There have been a lot of concerns in the market about its possible ramifications on the economy. Let us look at a few of them :

Pay Commission | Issues raised

Economic analysts had warned of slippages in the fiscal deficit, a possible boost to inflation, and a setback to public investment due to these hikes. However, the finance ministry has clarified that the impact on the fiscal can be easily digested by the Indian economy. Even the Economic Survey 2015-16 observes that the fiscal capacity of the Government is enough to accommodate the costs of the pay commission. It also observes that the inflationary impact due its implementation would be minuscule as observed during the implementation of 6th Pay Commission.

Pay Commission | Factors for setting a minimum pay


Pay commission arrives at a figure for minimum pay in government with reference to norms laid down by the 15th Indian Labour Conference (ILC) in 1957.

  • The ILC had said that the minimum wage should cover the basic needs of a worker and his family, that is, a spouse, and two children who are below the age of 14.
  • The seventh pay commission has spelt out the norms it has used for determining basic needs. It has gone by food requirements specified by a well-known nutritionist along with provisions for clothing, fuel and lighting, education, recreation, festivities, medical expenses, and housing.
  • The commission has also provided an addition of 25% to the total to provide for the skill factor (the basic needs having been determined for an unskilled person).

Based on the above mentioned norms, the Pay Commission arrives at a minimum wage of Rs 18,000 for a government employee.

  • This is 2.57 times the minimum pay in the Sixth Pay Commission.
  • The increase over the projected pay on the current basis as of January 1, 2016 is 14.3%.
  • This is the second lowest increase recommended by any Pay Commission since the first one, and it is way below the 54% increase following the last one.

Pay Commission | Effects on hierarchy of Government workforce?

According to these recommendations, pay at the lower levels of government will be higher than in the private sector. However, at the top, the position is reversed, that is pay at higher levels of government will be lower than in the private sector.

  • Various studies have shown that pay in the private sector today is contributing towards massive inequalities in Indian society.
  • Thus, having the reversed structure in government is a useful corrective to trends in the private sector. It will help contain tensions created by rising inequality.

7th Pay Commission | Impact on the finances of central government

  • The impact of the pay hike on the Central government (including the railways) will amount to 0.65% of GDP. This is less than the impact of 0.77% of GDP on account of the Sixth Pay Commission.
  • The impact on the Central government (excluding Railways), which is what matters when it comes to the Union budget, is 0.46% of GDP. In reality, the impact will be much more less as some of the increase in salary comes back to the government as taxes.

Thus, the overall impact on the fiscal at the central level is barely noticeable.

7th Pay Commission | Positive implications of the hike

  • Increased pay for government employees means greater government expenditure and hence a fiscal stimulus — provided government expenditure on other counts is not reduced and the fiscal deficit rises.
  • Greater income in the hands of government employees could favourably impact sectors such as the real estate, automobiles and consumer goods.

Pay Commission | India v/s the United States – A Case study

  • In 2012, the non-postal civilian workforce in the US was 21.3 lakh. In India, the corresponding figure in 2014 was 17.96 lakh.
  • The number of personnel per lakh of population in India was 139 in 2014, way below the figure of 668 for the US.

7th Pay Commission | Conclusion

The government now should concentrate on conducting periodic management audits of government departments on parameters such as cost effectiveness, timeliness and customer satisfaction. Improving service delivery in government is also the key issue which needs to be addressed.


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