India Ratings and Research, following the Cabinet’s decision to clear all recommendations made by the Seventh Pay Commission report, resulting in about 23.55 percent overall increase in salaries, allowances and pension for more than 1 crore government staff and pensioners, has said that implementation of the much- awaited pay hike for one crore central government employees and pensioners will boost domestic consumption by Rs 45,110 crore as also push up household savings. Overall it is positive for growth with modest risk on inflation.
According to India rating the gross impact of the increased pay out on the government exchequer is likely to be Rs 94,775 crore or 0.63 per cent of GDP. It added that the central government will receive income tax on this pay out and collect excise duty on consumption, after sharing the increase in income tax and excise duty with states. Thus the net impact on the central government finances is estimated to be Rs 80,641 crore or 0.54 per cent of GDP.
However, the rating agency also said that consumer price index inflation may inch up somewhat due to higher prices of services, but the impact on wholesale price index is likely to be muted due to the counter balance provided by the deflation in commodity prices and the availability of excess capacity in several manufacturing sectors.
As per India rating agency consumption in the economy will get a boost of Rs 45,110 crore or 0.30 per cent of GDP and increase savings will increase by Rs 30,710 crore or 0.20 per cent of GDP as consumption demand in urban areas is likely rise owing to the rising income levels. While the employees will get salary arrears from January 1, 2016, allowances will be paid only from July 1, 2016. The impact of the pay hike is expected to be less severe on state finances than expected earlier due to a lower arrear pay out.