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Monday, March 20, 2017

7th Pay Commission: Interesting facts on salary hike for state government employees

The news is not so encouraging for state government employees as far as salary hike is concerned. Only two states, Rajasthan and Madhya Pradesh, have made provision in their FY2018 budgets for raising salaries and wages of their government employees, out of nine. Six states have implemented the 7th Central Pay Commission (CPC) proposals on salary increase in FY2017.

The six states are Gujarat, Haryana, Kerala, Himachal Pradesh, Jharkhand and Chattisgarh.
Another aspect of salary and wages (S&W) is the slower pace of increase in wage bill next fiscal at 12 percent as against 15 percent in FY2016, brokerage Motilal Oswal Securities Ltd. (MOSL) said in a note.

Low consumption boost

For India Inc. looking at a fillip to consumption, from salary hike for Central government employees and their counterparts in the states, there is little to cheer. "We find that the 5th and 6th PCs boosted physical savings, not consumption. This time, however, with limited arrears and generally lower increase in salaries, a boost to (physical) savings is doubtful, let alone consumption," the brokerage wrote.

On the positive side, a prudential approach to salary hike is likely to result in manageable fiscal deficit, according to MOSL.

The partial implementation of the recommendations of the 7th CPC by the Central government last June opened the floodgates for similar demands by state government employees. The 7th CPC's proposals cover about 48.85 lakh Central government employees and 55.51 lakh pensioners.
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The Big Four disappointing states

"Maharashtra, Uttar Pradesh, Tamil Nadu and West Bengal are the four largest states in terms of S&W, accounting for more than 40 percent of total S&W bill of the state governments. None of these four states have announced the implementation of the 7th PC," MOSL said.

The Tamil Nadu government had announced the appointment of a five-member panel last month to examine the possibility of salary revision for its 18 lakh employees. The panel is expected to submit its report by June 30 this year.

What salary hike does to consumption, savings

Conventional wisdom suggests that Indians tend to save more and spend less whenever there is a salary hike. This is also evidenced by historical data, says MOSL, after an analysis of savings and consumption patterns in the context of pay commission-induced salary increase for employees.

"It is apparent that household savings saw a sudden surge during the years of implementation of PCs. Consumption growth, on the other hand, either decelerated (late 1990s) or remained stable (during FY09-FY10)," the brokerage says.

"In other words, household savings, not consumption, witnessed a surge during the 5th and 6th PCs. Within household savings, it is important to note that physical savings – which are primarily in real estate – saw a sharp sudden surge during PCs. Net financial savings, however, grew modestly," it added.
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Impact of states' finances 

The implementation of salary hike proposals by states will be spread over two financial years (FY 2017 and FY2018). Accordingly, it will impact their finances differently.

"The fiscal deficit of all four large states – Gujarat, Kerala, Madhya Pradesh and Rajasthan – is expected to narrow in FY18. Among the other states that have implemented the 7th PC, only Chhattisgarh has budgeted a higher deficit for FY18 compared to FY17," MOSL wrote in the note.
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