The pay hike effect

Implementation of the Seventh Pay Commission will boost economic growth in two ways: indirectly through stimulus to consumer demand and directly as govt output in GDP

The civil service pay hike cleared by the Narendra Modi government based on the Seventh Pay Commission’s recommendations will boost economic growth in two ways: indirectly, through the stimulus to consumer demand as the beneficiaries spend a large part of the bonanza on various gizmos, and directly, since the value of government output in gross domestic product (GDP) is calculated based on how much the government pays its employees.

The immediate challenge will be to figure out the impact of higher consumer spending on inflation. Pricing power has been weak because of excess capacity in Indian industry. But the most recent economic data shows that capacity utilization has begun to inch up while inflation pressures are building.

The really big question is quite different: do higher salaries guarantee better government services for citizens from whose taxes the bill will eventually be paid?