Thursday, November 26, 2015

Seventh pay commission will improve social balance

Here is the link to official report: http://7cpc.india.gov.in/pdf/sevencpcreport.pdf

Seventh pay commission when implemented will increase the pay and retirement benefits of those in the Govt. jobs, especially for those having lower wages now. It is estimated that recommendations will impact 47 lakh serving govt employees, 52 lakh pensioners, including defence personnel (See more at: http://indianexpress.com/article/india/india-news-india/highlights-of-7th-pay-commission-report/#sthash.JkwlxFCv.dpuf)

That is approximately 1 crore people (or ~1% of India’s population) seeing more money in their hands. And there would be 3x people in services sector (education, healthcare, transport etc.) serving these 1 crore people, they will become indirect beneficiary. If we consider their family members of these (1 crore + 3 crore) earning members, approximately 10 crore people will see their life style being bettered.

First point. How will Govt. fund these increases in pay is important. If they raise taxes, it may become robbing one to pay another scheme. But that is not the case now. Thanks to lower oil prices. Govt. took out all the subsidies on Diesel and marginally increased the taxes, so in that account, Govt. has a surplus this year when compared to a deficit last year. Lower fiscal deficit is indicating that Govt. is doing a fine job of balancing spend and income.

Second Point. It is a known fact that money in the consumer hands is spent wisely than Govt. spending it directly. So the Govt. employees with higher disposable income can decide better what to do with their money. That way money will reach far wider than the schemes of Govt. which will end up in wasteful expenditures. That will benefit economy a lot.

Third Point. There is an income inequality between the private and Govt. sector. This pay rise will help bridge that gap. Higher pay will attract better talent and they will bring in much needed improvements. It may also reduce the hunger for money in Govt. employees reducing the need to earn money through corruption route.

Fourth Point. Those having lower income spend more of their incomes than the rich. A daily wage labor spends almost all (100%) of his income for leading his life. Those earning higher income, let us say Rs. 20 lakhs per annum and above, they may spend 50% of their income or less for their routine expenditures. Even if Govt. raises taxes to pay more to its employees, it may result in higher consumer expenditure.


To conclude, higher pay for Govt. employees is a welcome move as it improves social balance by reducing income inequality and improves the economy. Only thing the Govt. has to ensure is, the productivity of its employees, it has to get an economic equivalent of higher pay else there will be more froth in the form inflation.