Experts predict consequences of 23% pay hike for India’s civil servants

By on 14/12/2015

A pay rise for India’s civil servants, expected to come into force next year, could spark a consumer boom, financial institutions predict, while economists warn of a looming budget hole.

An independent four-member pay commission tasked with carrying out a review of government salaries and pensions once every decade, last month recommended a 23% rise in civil service wages and pensions from January.

The recommendations are not legally binding on the government. However, successive administrations have often issued even more generous wage increases than those recommended by the commissions — and no government has ever given less than the amount recommended.

While the recommendations are for central government employees, the increases also have implications for India’s state governments, most of which match pay commission recommendations for their employees.

The increase is therefore not only likely to affect India’s 4.8m central government employees and 5.4m retired civil servants, but also officials across some 29 states.

A total of 34m workers will have more money to spend, as a result, according to Bloomberg, which described the increase as a potential “windfall for India’s $1.4tr stock market that’s headed for its first annual loss in four years.”

The pay commission’s proposals “will put a lot of money in the hands of consumers in one shot,” Vikas Gupta, an executive vice president at Mumbai-based Arthveda Fund Management, told Bloomberg, adding that two-wheeler makers and auto-parts companies will profit particularly from increased consumption. “2016 will be a year of consumption. There’s no question about it.”

Credit Suisse said that officials would probably spend their additional income mostly on housing, processed foods and entertainment.

Indian financial services conglomerate India Bulls says the stimulus could not have come at a better time: credit growth is hovering near a 20-year low and exports have fallen for 11 straight months.

However, the proposed salary boost poses a challenge to the efforts of prime minister Narendra Modi, to step up public infrastructure investment while curbing the budget deficit.

It would cost New Delhi $15bn per year — the equivalent of 0.65 per cent of gross domestic product — more than the figure already budgeted, according to the Financial Times.

Sonal Varma, chief India economist at Nomura financial group, told the FT the recommended increases could force the government to either raise taxes or curb infrastructure spending to meet its target of cutting the fiscal deficit to 3.5% of GDP in the next fiscal year, which starts in April.

“The timing is challenging,” Varma said. “It’s coming at a time when the government is trying to raise public investment in infrastructure, along with following the path of fiscal consolidation.

“Now you have the additional burden of the pay commission. The government will have to raise more revenue.”

About Winnie Agbonlahor

Winnie is news editor of Global Government Forum. She previously reported for Civil Service World – the trade magazine for senior UK government officials. Originally from Germany, Winnie first came to the UK in 2006 to study a BA in Journalism & Russian at the University of Sheffield. She is bilingual in English and German, and, after spending an academic year abroad in Russia and reporting for the Moscow Times, Winnie also speaks Russian fluently.

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