8th CPC Pay hike - A need of the hour for the economy

The government has announced the formation of the 8th Pay Commission to revise the salary scales of its employees. In the current economic situation, increasing salaries will likely boost spending and push the economy towards higher growth, explains Lekha Chakraborty.   

Driving Economic Recovery

This is a significant announcement, signaling that India will not resort to "fiscal austerity" by freezing salaries and pensions amidst the global financial crisis and rising global debt. This is a bold move to stimulate consumption in the face of increasing global inflation and slow economic growth.   

After the global financial crisis, India weathered the storm largely due to timely Pay Commission (PC) salary hikes and employment guarantee schemes. Revisions in salaries and pensions are eagerly awaited to increase disposable income. Private investment has been hesitant (despite India's consistent capital expenditure), mainly due to uncertainty about consumer demand after the pandemic. A key way to boost consumption is to increase salaries and wages. It's also important to support employees by providing adequate compensation to deal with rising inflation.   

The History of Pay Commissions

The Pay Commission in India was established to review and recommend changes to the salary structure of government employees, ensuring fair and equitable pay and improving employee well-being in the face of inflationary pressures. The first PC was set up in 1946, just before India's independence, to standardize pay scales and allowances for central government employees. Since then, seven more PCs have been formed. The 6th PC (2006) recommended a substantial increase in pay and allowances, considering the widening wage gap between the public and private sectors in a globalized India. The 7th PC (2015) recommended a 14.29% increase in basic pay and introduced a new pay matrix system. The 7th PC announcements raised concerns from the Armed Forces, and hopefully, the 8th PC will address these concerns.   

Who Benefits from Pay Commissions?

The beneficiaries of the PC recommendations are government employees, including civil servants working in various ministries, departments, and public sector undertakings; pensioners; and family pensioners. The PC reviews and recommends changes to their salary structure, allowances, and other benefits. It's estimated that there are around 4.7 million central government employees and 6.5 million pensioners. Of these, 1.4 million employees and 1.9 million pensioners are from the defense forces. Introducing two years of childcare leave through a "gender lens" was a landmark announcement. "Compassionate care leave" for employees to care for close relatives for up to six months is a much-awaited policy, given India's changing demographics and rising elderly population. The financial burden of demographic transition is significant, and gender-neutral "compassionate care leave" can be a cost-effective fiscal measure.   

Why Not Just Dearness Allowance (DA) and Annual Increments?

Economic growth has cyclical and structural elements. Short-term counter-cyclical fiscal measures don't guarantee economic recovery and demand boost. A PC should be viewed as a structural reform. India needs structural reforms for sustained economic recovery and to boost demand, beyond regular Dearness Allowance (DA) and annual inflation adjustments. The 8th PC is expected to bring structural reforms, reflecting new challenges in the labor market and living conditions, including those from Artificial Intelligence, and to ensure pay parity and equity against global economic headwinds. It's also expected to modernize pay structures to retain top talent within India.   

PCs conduct comprehensive cost of living reviews, recommend location-specific allowances, and ensure competitive salaries to prevent brain drain. This structural reform is crucial, despite fiscal constraints, to achieve growth with equity. Fiscal austerity measures will negatively impact India's growth story, especially with the Viksit Bharat 2047 roadmap. This roadmap isn't just about capital expenditure; it's also about boosting consumer confidence by increasing disposable income and enabling people to live with dignity through good salaries and wages.   

Compensation for Government and CPSE Staff

The basic compensation for government employees in India includes basic pay, dearness allowance (DA), house rent allowance (HRA), transport allowance (TA), and other allowances, plus pension. Central Public Sector Enterprises (CPSE) staff often have a more comprehensive package, including basic pay, DA, HRA, performance-related pay (PRP), perks like company accommodation and vehicles, and retirement benefits like gratuity and pension. CPSE staff often receive higher salaries and perks. Retirement benefits can vary between government and CPSE staff, showing the differences in compensation across government departments, ministries, and CPSEs.   

Do State Governments Always Follow Central Pay Commissions?

State governments often, but not always, follow the recommendations of Central Pay Commissions (CPCs). Some states, like Maharashtra and Gujarat, adopt the CPC’s recommendations with minor changes, while others, like Tamil Nadu and Kerala, may make significant changes or even create their own PCs. This is because states want to maintain fiscal autonomy and address state-specific concerns about salary structures, allowances, and pensions.   

For example, Maharashtra has its own PC, recommending different pay scales and allowances for state government employees. Similarly, Tamil Nadu has its own PC recommendations, providing higher salaries and allowances than the central government. Having their own PCs allows states to create tailored payment packages.   

Pay and Pension Expenditure Trends

The government's pay and pension expenditure has changed significantly over the years. With the 7th Pay Commission and One Rank One Pension (OROP) for defense pensions in 2016-17, revenue expenditure increased significantly. Pension payments have been steadily rising, with states' pension expenditure increasing from 0.6% of GDP in the early 1990s to 1.7% of GDP in 2022-23. In the 2023-24 Budget, pension payments were estimated at Rs 2.34 lakh crore, or 0.8% of the estimated GDP. The Centre’s total expenditure is expected to increase by 7.5% in 2023-24, reaching Rs 45.03 lakh crore.   

Salary/Pension Bill as a Share of Expenditure

The Union Budget 2024-25 showed that out of the total budget of Rs 48.21 lakh crore, pension constituted Rs 2.43 lakh crore (5.04%) and salaries Rs 1.62 lakh crore (3.36%). Interest payments are much higher at Rs 11.63 lakh crore (24.12%). The latest RBI report on State finances showed that states' expenditure on salaries and wages is 3.1% of GDP as per 2024-25 (Budget Estimate). The RBI report stated that "as a part of transparency measures, a few States have legislated the disclosure of estimated pension liabilities for the next ten years worked out on an actuarial basis to assess their likely pension burden, mode of financing and impact on deficit indicators.” The latest RBI report showed that pension expenditure as a percentage of total revenue expenditure is 11.9% in 2024-25 (Budget Estimate) for all states and UTs combined.   

Impact of Unified Pension Scheme

The Unified Pension Scheme's (UPS) aim to merge various pension schemes, including the National Pension System (NPS), will add complexity, requiring significant changes to the existing pension framework. The commission will need to consider the implications of the UPS on the overall compensation structure. This will require the 8th PC to balance the government’s fiscal space with the aspirations of employees and pensioners, making its recommendations even more challenging.   

Factors for the 8th PC to Consider

Fiscal space is a key concern. However, the fiscal multipliers of pensions and salaries to boost the economy by strengthening aggregate demand are likely to be higher. Citizens vote based on retrospective analysis of government policies. Rising inflation is another factor. Given the challenges from digitalization, big data, and AI, the commission needs a calibrated approach to enhance citizens' well-being. Finally, low salaries and wages are major reasons for corruption in the public sector.