New Delhi: In a move that will cheer millions of central government employees and likely spur demand for consumer durables, the government has decided to pay them seven months’ arrears at one go with their August salary.
The arrears are on account of the government deciding to implement the Seventh Pay Commission’s recommendations with effect from January 2016.
D.K. Joshi, chief economist at Crisil Ltd, said the additional disposable income coming into the hands of central government employees just ahead of the festive season will add to the urge to spend, especially on consumer goods.
“The pay hike will provide a mild boost to the economy. While the arrears will give a one-time boost to consumption spending, the increase in salary will add to the ability to take long-term loans. If the monsoon remains on track, then it will provide another boost to the economy later in the year through increased rural spending,” he said.
Joshi discounted inflationary pressure stemming from the payout, noting that there is excess capacity in the economy.
“The pay hike may only increase the utilization of the existing capacity with industries,” he added.
While the government notified implementation of the Seventh Pay Commission’s recommendations on Tuesday, clearing the way for the payment of increased salaries and pensions to around 10 million employees and pensioners with effect from August, it directed various government departments to commence the exercise of fixing salaries to be paid to individual employees in August on Friday.
“The Pay Commission revision will have a positive impact on the consumer durable sector,” said Dhanraj Bhagat, partner at Grant Thornton Llp, a consulting firm.
With most buyers opting for loans to finance purchases, an increase in disposable income will make payment of loan instalments easier, said Bhagat, adding that the impact on sales will be visible from September, when the festive season kicks in.
The revised pay structure, effective from 1 January 2016, includes dearness allowance of 125%; a committee has been set up to decide the implementation of allowances such as housing rent.
“Until then, all such allowances shall continue to be reckoned and paid at the existing rates under the terms and conditions prevailing in the pre-revised pay structure as if the existing pay structure has not been revised,” said a statement issued by the finance ministry.
The contributions under the Central Government Employees Group Insurance Scheme shall continue to be applicable under the existing rates until further orders. The existing system of interest-free advances for medical treatment, travelling allowance for the family of deceased, travelling allowance on tour or transfer and leave travel concession shall continue.
The government had earlier set up a committee under the department of personnel and training to examine individual, post-specific and cadre-specific anomalies arising out of the implementation of the recommendations.
Employees’ unions deferred a strike they planned to start on 11 July to press demands for higher minimum pay after the government said a committee would study the anomalies and suggest remedial measures.
Government employee unions demanded a minimum pay of Rs.26,000; the commission had recommended Rs.18,000. It recommended a 23.55% increase in overall emoluments for employees.
According to the commission’s recommendations, the minimum monthly pay has been fixed at Rs.18,000 and the maximum at Rs.2.5 lakh at the level of cabinet secretary, the country’s senior-most civil servant.
The financial impact of the recommendations in 2016-17 will amount to Rs.1.02 trillion. Of this, the increase in pay would account for Rs.39,100 crore, increase in allowances for Rs.29,300 crore and increase in pensions for Rs.33,700 crore.
The notification issued on Tuesday said there shall be two dates for grant of increments, 1 January and 1 July of every year instead of the existing date of 1 July, provided that an employee shall be entitled to only one annual increment on either one of these two dates, depending on factors such as the date of appointment or promotion.
The government also accepted a recommendation that central government employees should not get an annual increment if their performance is not up to mark. The benchmark for performance appraisal for promotion and financial upgradation has been enhanced to “very good” from “good” under the Modified Assured Career Progression Scheme (MACPS), and if an employee fails to meet the benchmark of either MACPS or a regular promotion within the first 20 years of their service, his/her annual increments will be withheld, said the notification.
Shally Seth in Mumbai contributed to this story.