Budget 2016: 7th Pay Commission, OROP a challenge for Modi govt; schemes to raise fiscal burden
New Delhi, Feb 29: The Finance Minister Arun Jaitley presents NDA government's third budget in Parliament on Monday.
Jaitley faces a tough task of balancing the needs of farm sector as well as industry. The 7th Pay Commission is going to be another big task as the recommendations by pay panel is likely to add to his fiscal problem.
Even the Economic Survey 2015-16 said that, "Fiscal 2016-17 is going to be "challenging" with the One Rank, One Pension (OROP) scheme and the Seventh Pay Commission putting pressure on the government's expenditure."
Also read: All you need to know about Union Budget 2016
"The implementation of the Pay Commission recommendations and the One Rank, One Pension (OROP) scheme will put an additional burden on expenditure," the Survey said.
To get over this burden, alternative sources for revenue generation will be looked at. These measures will include improved tax compliance/better tax administration in an effort to keep the fiscal deficit in line with the revised roadmap.
The Seventh Pay Commission has recommended hike in salary and has said that the government allowances be increased significantly. Implementation of this would add about half a per cent of GDP to the Centre's wage bill.
Also read: Union Budget 2016: Highlights
According to a report in the hindubusinessline, "As per the fiscal roadmap laid out by the government, the deficit is to be brought down to 3.9 per cent of GDP in the current fiscal from 4.1 per cent in the last financial year of 2014-15. The target for 2016-17 is to bring it down further to 3.5 per cent.
The fiscal deficit target of 3.9 per cent to GDP, is achievable on the back of the "pattern of revenue and expenditure" in the first nine months of fiscal year 2015-16."
Impact of implementation of Pay Commission on inflation
- But reports also suggest that if the government accepts these recommendation, it would 'most likely' not destabilise prices and inflation expectations.
- "If the 6th Pay Commission award barely registered, the 7th Pay Commission is unlikely to either, given the relative magnitudes, even if fully implemented," the Economic Survey tabled in Parliament said.
- The Survey noted expected wage bill (including railways) will go up by around 52 per cent under the Seventh Pay Commission vis-a-vis 70 percent under the 6th pay commission.
- Elaborating further on impact of implementation of pay commission on inflation, the Survey said in principle, inflation reflects the degree to which aggregate demand exceeds aggregate supply and pay awards determine only one small part of aggregate demand.
- "Since the government remains committed to reducing the fiscal deficit, the pressure on prices will diminish, notwithstanding the wage increase," it added.
- Besides, pre-Budget Survey said theory does suggest that a sharp increase in public sector wages could affect inflation if it spilt over into private sector wages and hence private sector demand.
- "But currently this channel is muted, since there is considerable slack in the private sector labour market, as evident in the softness of rural wages," it said.
- The 7th Pay Commission has recommended a 23.55 percent hike in salary, allowances and pension, involving an additional burden of Rs 1.02 lakh crore, to central government employees and pensioners.
- The Pay Commission recommendations, when implemented, would have bearing on remuneration of 47 lakh central government employees and 52 lakh pensioners. Subject to acceptance by the government, the recommendations will take effect from January 1, 2016.
Impact of OROP
- Not to forget the annual expenditure for the 'One Rank One Pension' (OROP) scheme which has been estimated to be around Rs.7,500 crore which is yet another challenge.
- The annual recurring financial implication on account of implementation of OROP at the current rate will be approximately around Rs 7500 crore.
- The arrears from 01/07/2014 to 31/12/2015 would be approximately Rs10,900 crore.
- The total increase in the Defence Budget for pensions is estimated to go up from Rs 54,000 crore (BE 2015-16) to around Rs 65,000 crore (proposed BE 2016-17), thereby increasing the Defence Pension Outlay by about 20 per cent.
(With inputs from agencies)