Is 7th Pay Commission a challenge for 2016-17? 2 govt documents, 2 views

THE Economic Survey tabled in Parliament on Friday noted that the Centre’s expected wage bill (including the railways) will go up by around 52% because of the 7th Central Pay Commission, but the pay hike is unlikely to destabilize prices; nor will it have any major impact on inflation. But the Rail Budget tabled in Parliament a day before the Economic Survey said it in clear terms that it is a challenge calling the 7th Pay Commission one of the headwinds beyond the control of Indian Railways. Railway minister in his Rail Budget speech said the following with regard to the 7th Pay Commission:

“These are challenging times, may be one of the toughest. We are faced with two headwinds, entirely beyond our control; tepid growth of our economy’s core sectors due to international slowdown and the looming impact of the 7th Pay Commission and increased productivity bonus payouts”.

Also, the increased payouts in 2016-17 because of the implementation of the 7th Pay Commission, will increase the operating ratio of the Indian Railways to 92% from the current 90%, an indication that demonstrates the health of the railways. The operating ratio means operating expenses as a percentage of the revenue. “For the year 2016-17, we expect an Operating Ratio of 92%, after including the immediate impact of the 7th Pay Commission, as against 90% likely to be achieved in the current year”, minister Prabhu said in his Budget. In other words, for the year 2016-17, for every Rs 100 the railways earns, it has to spend as high as Rs 92 for operating expenses mainly on account of salary and pension of the workforce. That means, the railways will be able to save mere Rs 8 out of Rs 100 it earns, for future capital investments. 

“Taking note of likely impact of 7th CPC, the pension outgo has been budgeted at Rs 45,500 crore in 2016-17. Higher staff cost and pension liability impacts the internal resource”, the Rail Budget said further. 

According to the 7th Pay Commission’s own report, now under consideration for implementation, the new pay scales are likely to put an additional burden of Rs 1.02 lakh crore on the exchequer in 2016-17. 

But the Economic Survey, a document prepared by the chief economic adviser’s officer under the ministry of finance said, "For most of the current fiscal year, inflation has remained quiescent, hovering within the RBI's target range of 4-6%. But looming on the horizon is the increase in wages and benefits recommended for government workers by the Seventh Pay Commission (7th PC). If the government accepts this recommendation, would it destabilise prices and inflation expectations? Most likely, it will not…”.