7TH PAY COMMISSION IMPACT

There has been a concern about the impact of the 7th Pay Commission (PC) recommendations on inflation. As per the Economic Survey 2015–16, the historical evidence suggests that the 6th PC award hardly had any such impact (between September 2008 to September 2009) even if it gave huge arrears. The Survey adds that the 7th PC is unlikely to have any big impact on inflation even if fully implemented (including railways) – wage bill of the GoI will go up around 52 per cent (it went up by 70 per cent in case of the 6th PC). The Survey provides three factors in favour—

(i) Inflation reflects the degree to which aggregate demand exceeds aggregate supply. Wages determine only one small part of aggregate demand—in fact, they do not even determine government demand (which depends on the overall fiscal deficit). Fiscal deficit is the difference between how much the state is injecting into the economy through overall spending and how much it is taking away through taxes. Since the government remains committed to reducing the fiscal deficit (from 3.9 per cent of 2015–16 to 3.5 per cent in 2016–17), the pressure on prices will diminish, even if wages go up.

(ii) A sharp increase in public sector wages could affect inflation if it spilled over into private sector wages (and hence private sector demand). But currently this channel is muted, since there is considerable slack in the private sector labour market, as evident in the softness of rural wages. And even if private sector wage increases nonetheless do quicken somewhat, the existence of substantial capacity underutilisation suggests that firms might find it difficult to pass the cost increase onto consumer prices.

(iii) Lastly, there will be some mechanical impact of the increase in the house rent allowance (HRA) on the housing component of the CPI. But this effect is likely to be modest between 0.15 and 0.3 percentage points (the weight of rented government housing—centre and state—in the CPI is 0.35 per cent). And even then it will merely have a one-off effect on the level of the CPI, rather than the rate of inflation going forward, which is the real target of the RBI.

This way, the Survey concludes that there will not be any big and long- term impact on inflation even if the Government decides to implement the 7th PC award.