Central government’s salary expenditure will exceed Rs 1 lakh crore in the current fiscal and is projected to increase further with the recommendations of 7th Pay Commission, posing risk to public finances, Finance Ministry said todayAccording to the Medium-Term Expenditure Framework Statement tabled in Parliament, the salary outgo of central government employees will go up by 9.56 per cent to Rs 1,00,619 crore in current fiscal.
The 7th Pay Commission is likely to raise the salaries of government employees by up to 40 per cent, said Neelkanth Mishra, India equity strategist of Credit Suisse. The Pay Commission will submit its recommendations in October and it will be implemented by next year.
The pace will increase further in 2016-17 at 15.79 per cent to Rs 1.16 lakh crore with the likely implementation of the 7th Pay Commission award, said the statement tabled by Finance Minister Arun Jaitley in Parliament.\
The outgo towards salary will further rise in 2017-18 to over Rs 1.28 lakh crore.
“The award of VII Central Pay Commission (CPC) and its impact on government finances poses a risk,” said the statement.
It also raised concerns about the rising pension bill of government employees saying it will rise to Rs 88,521 crore in current fiscal. It has been pegged at over Rs 1.02 lakh crore in 2016-17, and over Rs 1.12 lakh crore in 2017-18.
“Like in salaries, higher than normative growth has been provided for the projection of outlay on pensions during 2016-17. For the second year of the projection (2017-18), a normative growth has been assumed. Award of VII CPC and its impact on Government finances poses a risk,” it added.
The recommendations of the 7th Pay Commission, which was set up by in February 2014, is likely to be implemented from January 1, next year.
Credit Suisse says about one-third of India's middle class is employed by the government and as the 7th Pay Commission comes through, there will be an improvement in discretionary spending.
"In Tier 3, Tier 4 towns where government employees are 50-60 per cent of the middle class, it is very likely that real estate markets will take off again," Mr Mishra said.
Once the Pay Commission submits its recommendations in October, it will take 3-6 months for the Centre and the states to announce its implementation, Credit Suisse said.
Gujarat and Madhya Pradesh have already indicated that they are going to implement the 7th Pay Commission recommendations from January 1, 2016, he said.
As clarity emerges on the 7th Pay Commission, consumption will see an uptick and that could act as a stimulus to the economy, the brokerage said.
However, Mr Mishra struck a note of caution. "Clearly if you see a third or 35 per cent of your middle class getting a 40 per cent or 30 per cent jump in compensation in one shot, the fears of inflation will rise." Expectations of rate cuts can get pushed out and some possible fiscal pressures can emerge, he warned.