No Rate Change: Raghuram Rajan spots an upside risk to inflation because of 7th Pay Commission, others

WHEN there has been an intense speculation about RBI Governor Raghuram Rajan's extension at Mint Road, the Governor on Tuesday decided to pose again. At 11 am, as Rajan began his monetary policy statement, he did not surprise many by keeping the repo rate unchanged at 6.5% and CRR at 4%. A cut in these rates could have made loans cheaper. But what made the Governor to take that decision? It’s the implementation of the 7th Central Pay Commission coupled with…

rising crude prices that have posed upside risk to inflation, says RBI. And Rajan’s preferences to counter-inflationary measures even at the cost of killing growth is well known.

As high as 47 lakh Central government employees and 52 lakh pensioners stand to benefit from the 7th Central Pay Commission recommendations, which are likely to be effective retrospectively from April 1, 2016. Currently, the department of expenditure is fine-tuning its implementation, but it will be effective only after the cabinet takes it up and approves the final report.  

And if the government goes by its recommendations, the implementation of the 7th Central Pay Commission as it is, means giving the government exchequer a burden of about Rs 1 lakh crore.  

According to the recommendations, the starting salary of IAS and Group “A” services officers will be Rs 56,100 per month whereas union joint secretary’s salary will start at Rs 1.82 lakh per month and for secretary it has been fixed at Rs 2.25 lakh. The cabinet secretary, the topmost bureaucrat in the country, will receive Rs 2.5 lakh per month. These figures however don’t include allowances such as government vehicle, driver, phone bills etc. 

The Economic Survey which was tabled in Parliament in February however noted that the Centre’s expected wage bill (including the railways) would go up by around 52% because of the 7th Central Pay Commission, but the pay hike is unlikely to destabilize prices, and it will not have any major impact on inflation.

But Rajan does not think that way. For him, any inflationary trend is dangerous to the health of the nation’s economy. 

But will Rajan get an extension of his tenure beyond September? Rajan said on Tuesday that it would be “cruel of him to spoil the fun press has been having over my tenure”. The RBI Governor is appointed for three years, which is extendable by another two years. Since 1992, every RBI Governor has managed a two-year extension, but there has been a question mark on whether Rajan would get an extension in the backdrop of fierce criticism by BJP MP in Rajya Sabha Subramanian Swamy calling Rajan "mentally not fully Indian" as the Governor renews the Green Card issued to him by the US government.