'7th Pay Commission will boost India's consumption by Rs 4,511 crore'

The implementation of the long-awaited 7th Pay Commission's pay hike for over 1 crore central government employees and pensioners will be positive for India's economy as it will increase consumption  in the country, said an economist from India Ratings and Research. 

The Cabinet Committee of Economic Affairs (CCEA), headed by PM Narendra Modi  on Wednesday, cleared the recommendations of the 7th Pay Commission to which the overall hike in salary and allowance of  central government employees and pensioners comes to 23.5%. 

The implementation of 7th Pay Commission will boost consumption to the economy by Rs 4,511 crore (0.30% of GDP) and increase savings by Rs 3,071 crore (0.20% of GDP), said India Ratings and Research's chief economist and head public finance Dr Devendra Pant in a statement on Wednesday. 

According to Pant,  after the sharing of central taxes with the state governments, the central government's net tax revenue will increase by Rs 14,100 crore (0.09% of GDP) in FY17. 

Watch the full news video of 7th Pay Commission here-

In the 7th Pay Commission, the entry-level pay has been recommended to be raised to Rs 18,000 per month, from the current Rs 7,000, while the maximum pay, drawn by the Cabinet Secretary, has been fixed at Rs 2.5 lakh per month from the current Rs 90,000, PTI reported. 

The government will pay revised salaries to central government employees from July 1 this year.  The employees will get salary arrears from January 1, 2016,  but allowances will be paid only from July 1.

Therefore, the gross impact of 7th Pay Commission is likely to Rs 94,775 crore (0.63% of GDP), cited the ratings agency.  

"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 (0.54% of GDP)," Pant said. 

As far as the impact of 7th Pay Commission on state government finances is concerned, it is likely to be less severe than what was expected earlier due to lower arrears pay out.

According to India Ratings, the impact of pay revision of state government employees will be felt only in FY18. 

"In all likelihood, the impact of a salary revision of the 7th Central Pay Commission on state government finances will be Rs 1.58 trillion in FY18 (0.95% of FY18 GDP)," cited Pant in a statement. 

Though 7th Pay Commission is applicable to central government employees, the salaries  and pension of state government employees, urban local bodies, etc., will also be revised in FY17 and FY18. 

India Ratings' estimate shows that the  demand boost to the economy as a result of the revision in the salaries or pensions of  state government employees will be at least four times the 7th Pay Commission award. 

The ratings agency does not see any immediate threat to inflation after the implementation of 7th Pay Commission.