New Delhi: Pay hike for central government employees is unlikely to have any major impact on inflation but it will certainly have a telling effect on interest rates and fiscal deficit, which has already come under pressure due to rise in various unbudgeted expenditure, feel economists.
“The pay increase for government employees won’t make a great difference (on inflation) as inflation is a supply side problem,” said M Govinda Rao, Director, National Institute of Public Finance and Policy (NIPFP) and member of the Prime Minister’s Economic Advisory Council.
However, he added, government’s fiscal deficit would go up by around 0.4% of the GDP as Centre would have to garner additional resources to foot higher wage bill.
Government on 14 August announced implementation of the modified recommendations of the sixth pay commission which would cost the exchequer over Rs22,000 crore during this fiscal.
The government has also decided to pay 40% of the arrears of pay during 2008-09 and the remaining 60% in the next fiscal.
“If there are no other countervailing measures in terms of tax collection then both revenue and fiscal deficit will go up be around 0.4% of GDP”, Rao said.
Pointing out that high fiscal deficit does not put much pressure on inflation, he said, “it (higher fiscal deficit) will put pressure on interest rates.”
Another economist Rajesh Shukla, senior fellow of National Council of Applied Economic Research (NCAER) opined that,“inflation has been caused by external factors and pay hike will not result in any significant pressure on prices.”
Although the pay panel award has come at a time when the inflation is ruling at 13-year high level of 12%, Shukla said, “with festival season round the corner, the pay hike will only boost consumer expenditure without putting additional pressure on inflation.”
Higher purchasing power of the salaried class, he added, would also be good for the industry which is witnessing a demand slowdown.
However, the pay panel award, he added, “will certainly have an impact on fiscal deficit. The government expenditure will go up and we will have to see how the government manages additional outgo. The government plans are not yet clear.”
Another economist Rajiv Kumar, Chief Executive, Icrier, however, took a different view on impact of pay hike on inflation by pointing out, “If the government is paying out (arrears) in cash it will further worsen the inflationary situation.”
More problem could be seen next year as the Centre would be paying 60% of salary arrears to government employees, he added.