How the Seventh Pay Commission implementation will impact the economy?

The central government has awarded an average of 23.5 % hike in salaries, allowances and pensions for more than 4.7 million central government employees and 5.3 million pensioners as per the recommendations of the Seventh Pay Commission.

Such a large volume of salary hike among the millions of central government employees will definitely leave some effects on the economy as a whole itself. The major effects are that of a rise in consumption, savings, rise in prices of some commodities, higher tax revenues for the government and more importantly a momentum in economic activities. Similarly, the pay hike for central government employees will trigger similar pay hike for state government employees as well. Following are the major effects of the Seventh Pay Commission Award.

Rise in more demand for cars and houses and industrial sector revival

The strongest effect of the pay hike will be on aggregate demand in the economy. More cash with salaried people will trigger higher consumption. According to bankers, demand for cars and houses will go up tempting banks to lend more. Pick up in loans will energize banks as the creditworthiness of the salaried people is high.

 “When you spend there is taxation, demand is also generated. When you save that, savings is used in development of the country. It also has some inflationary pressure,” Finance Minister Arun Jaitley mentioned about the impact of the pay hike on the economy.

Consumer demand for other durables will also increase and this will propel industrial sector growth.

Higher demand definitely means rise in inflation in the short term as well. 

More savings and tax revenues

A pleasant outcome of the pay hike is the increased savings as the household income expands. Most of the salaried people will raise their savings to utilize the opportunities of tax exemptions.

Government will be a beneficiary of the salary hike indirectly as tax revenue will go up given the present exemption limit of Rs 2.5 lakh. 

“So the extra money also comes back into the system which increases size of economy,” Finance Minister explains the overall benefit of the salary hike.

At the same time, the government’s fiscal health may take a beating as the fiscal deficit may go up slightly to accommodate increased salary and pension payments.

The new hike will increase the budgetary burden of Rs 102100 crore this year and Rs 72800 crore next year according to the Finance Minister. Bulk of the expenditure will be met out of the general budget.

The pay hike is an expenditure burden on the one hand, but on the other hand it is some sort of a stimulus to the economy, enhancing savings, consumption, industrial sector growth, bank credit etc.