7th Pay Commission report: How the macro impact will pan out explained

The 7th Pay Commission has created a lot of anxiety in the bureaucracy and beyond and today is expected to be the D-day when the Cabinet announces its approval of the panel’s recommendations.
However, considering that the outgo will be huge and put great stress on the already cash-strapped government, exactly how the report may impact the economy is still in the grey zone for most.
With that in mind, here is what the the 7th Pay Commission itself had to say about it:
“With the above framework in place we can now assess the extent to which the Seventh Central Pay Commission’s recommendations address macroeconomic conditions, the need for fiscal prudence and availability of adequate resources for development and welfare expenditures. Table 2 presents different categories of PAP expenditures as percentages of GDP over time. It is clear from the table that pay and allowances as a proportion of GDP has remained fairly stable since 2010-11, i.e., in the range of 1.8 percent and 2.0 percent, as has the share of pensions, which has ranged between 0.9 percent and 1 percent of GDP.
The Seventh CPC recommendations can cause macroeconomic stress in two ways: 1. The awards of the previous Pay Commissions, both V as well as the VI, involved payment of arrears. If awards are made with an arrears component then the cumulative impact of arrears would temporarily increase government expenditure on PAP, thereby causing an appreciable shock, albeit for a short time. This shock impacts both fiscal stability and the price level through demand and supply channels. However, the Seventh CPC recommendations entail, at best, payments of marginal arrears and we do not therefore envisage any macroeconomic shock on this score.
2. A pay commission award can cause a significant increase in the ratio of PAP to GDP in the year the award is implemented. This happens for two reasons:
a. Due to the fact that many allowances are not fully indexed to DA, and some allowances are not indexed at all, there is some increase in expenditure on PAP that happens when basic pay and DA are merged.
b. Total government spending on PAP increases due to an increase in the real value of PAP as a consequence of a pay commission award.
As we show in Table 2 the cumulative effect of these elements on the award of the VI CPC was of the order of 0.77 percent of GDP in 2009-10. This Commission is of the view that any macroeconomic impact that exceeded this number would not be fiscally prudent and would put undue pressure on the government in terms of discharging its development and welfare spending responsibilities. Table 2 shows the impact of the proposed recommendations of the Seventh CPC. In arriving at an assessment of the impact, three Scenarios have been considered.
Scenario I represents a “business as usual” scenario i.e., a situation that we estimate would prevail in the absence of the pay commission award. Scenario II represents the net impact on the PAP-GDP ratio if the Commission were to only merge basic pay and DA. Scenario III represents the full impact of the Seventh CPC’s recommended award on the PAP-GDP ratio.”

Source: xaam.in

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