The hike in wages under the 7th Pay Commission is unlikely to destabilise prices and will have little impact on inflation, the Economic Survey said today.

“For most of the current fiscal year, inflation has remained quiescent, hovering within the RBI’s target range of 4-6 per cent. But looming on the horizon is the increase in wages and benefits recommended for government workers by the Seventh Pay Commission (7th PC).

“If the government accepts this recommendation, would it destabilise prices and inflation expectations? Most likely, it will not,” the survey, tabled in Parliament, said.

Citing example of implementation of the Sixth Pay Commission, the pre-Budget document said the Commission award barely registered on inflation despite the lumpiness of the award, owing to the grant of arrears.

“If the 6th Pay Commission award barely registered, the 7th Pay Commission is unlikely to either, given the relative magnitudes, even if fully implemented,” it said.

The Survey noted expected wage bill (including railways) will go up by around 52 per cent under the 7th Pay Commission vis-a-vis 70 per cent 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 per cent 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.

PTI

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Ministry of Finance

More than 6 Per Cent Growth Forecast for Next Fiscal Considerable Enhancement for Social Sector Spending India on Verge of Creating Quality Jobs to Seize ‘Demographic Dividend’

Indian economy is likely to grow between 6.1% to 6.7%  in 2013-14 as the downturn is more or less over and the economy is looking up. Following the slowdown induced by the global financial crisis in 2008-09, the Indian economy responded strongly to fiscal and monetary stimulus and achieved a growth rate of 8.6 per cent and 9.3 per cent respectively in 2009-10 and 2010-11, but due to a combination of both external and domestic factors, the economy decelerated growing at 6.2% and an estimated 5% in 2011-12 and 2012-13 respectively. The Economic Survey 2012-13, presented by the Finance Minister Shri P. Chidambaram in the Lok Sabha predicts that the global economy is also likely to recover in 2013 and various government measures will help in improving the Indian economy’s outlook for 2013-14. While India’s recent slowdown is partly rooted in external causes, domestic causes are also important. The slowdown in the rate of growth of services in 2011-12 at 8.2%, and particularly in 2012-13 to 6.6 percent from the double-digit growth of the previous six years, contributed significantly to slowdown in the overall growth of the economy, while some slowdown could also be attributed to the lower growth in agriculture and industrial activities. But despite the slowdown, the services sector has shown more resilience to worsening external conditions than agriculture and industry. For improved agricultural growth, the survey underlines the need for stable and consistent policies where markets play an appropriate role, private investment in infrastructure is stepped up, food price, food stock management and food distribution improves, and a predictable trade policy is adopted for agriculture. FDI in retail allowed by the government can pave the way for investment in new technology and marketing of agricultural produce in India. Fast agricultural growth remains vital for jobs, incomes and food security.

The survey points out that the priority for the Government will be to fight high inflation by reducing the fiscal impetus to demand as well as by focusing on incentivizing food production through measures other than price supports. But unlike the previous year, when food inflation was mainly driven by higher protein food prices, this year the pressure has been coming mainly from cereals. On the Balance of Payments and External Position, the survey highlights that with net exports declining, India’s balance of payments has come under pressure. Moreover, in the current fiscal, foreign exchange reserves have fluctuated between US$ 286 billion and US$ 295.6 billion, while the rupee remained volatile in the range of Rs 53.02 to Rs 54.78 per US dollar during October 2012 to January 2013.

The survey had a special chapter focusing on jobs. The future holds promise for India provided we can seize the “demographic dividend” as nearly half the additions to the Indian labour force over the period 2011-30 will be in the age group 30-49. India is creating jobs in industry but mainly in low productivity construction and not enough formal jobs in manufacturing, which typically are higher productivity. The high productivity service sector is also not creating enough jobs. As the number of people looking for jobs rises, both because of the population dividend and because share of agriculture shrinks, these vulnerabilities will become important. Because good jobs are both the pathway to growth as well as the best form of inclusion, India has to think of ways of enabling their creation.

The survey calls for a widening of the tax base, and prioritization of expenditure as key ingredients of a credible medium term fiscal consolidation plan. This along with demand compression and augmented agricultural production should lead to lower inflation, giving the RBI the requisite flexibility to reduce policy rates. Lower interest rates could provide an additional fillip to investment activity for the industry and services sectors, especially if some of the regulatory, bureaucratic, and financial impediments to investment are eased. On financial sector reform, it takes note of the high level of gross NPAs (non-performing assets) of the banking sector which increased from 2.36 percent of the total credit advanced in March 2011 to 3.57 percent of total credit advanced in September 2012. The survey suggests that revival of growth will help contain NPAs, but more attention will have to be paid to whether projects are adequately capitalized up front given the risks. Expenditure on social services also increased considerably in the 12th Plan, with the education sector accounting for the largest share, followed by health. In the 11th Plan period nearly 7 lakh crore rupees has been spent on the 15 major flagship programmes. A number of legislative steps have also been taken to secure the rights of people, like the RTI, MGNREGA, the Forest Rights Act, AND THE Right to Education. However, the survey notes that there are pressing governance issues like programme leakages and funds not reaching the targeted beneficiaries that need to be addressed. Direct Benefit Transfer (DBT) with the help of the Unique Identification Number (Aadhaar) can help plug some of these leakages. With the 12th Plan’s focus on ‘environmental sustainability’, India is on the right track. However, the challenge for India is to make the key drivers and enablers of growth-be it infrastructure, the transportation sector, housing, or sustainable agriculture-grow sustainably.

Dr. Raghuram G. Rajan, Chief Economic Adviser, Ministry of Finance writes in an introduction to the Survey that these are difficult times, but India has navigated such times before, and with good policies it will come through stronger. Slowdown is a wake-up call for increasing the pace of actions and reforms. The way out lies in shifting national spending from consumption to investment, removing the bottlenecks to investment, growth, and job creation, in part through structural reforms, combating inflation both through monetary and supply side measures, reducing the costs for borrowers of raising finances and increasing the opportunities for savers to get strong real investment returns.

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The Economic Survey 2012-13 presented by the Union Finance Minister, Shri P. Chidambaram in the Lok Sabha today emphasizes that the fiscal outcome of Central Government in 2012-13 so far indicates a significant improvement over 2011-12. The fiscal position of the States has continued to progress with fiscal deficit budgeted at 2.1% of gross domestic product (GDP), the Survey added.

The fiscal outcome of 2011-12 was affected by macro economic developments of slow down in growth, higher global crude oil prices and sluggish financial market conditions for effecting the budgeted disinvestments programme. The Survey stresses that these developments continued through the first half of the current year. The Government then pressed harder for reforms and an initial step was to set up the Kelkar Committee. Following its recommendations, the Government unveiled a revised fiscal consolidation roadmap.

The Economic Survey has called for staying on the path of indicated fiscal consolidation. This, it says, is critical to sustaining the desirable macro-economic outcomes not only in terms of higher growth in real GDP and lower inflation, but also in easing the financing of the widening current account deficit (CAD), for which India’s sovereign credit rating is important. The Survey also emphasizes widening tax base and privatization of expenditure as key factors in effecting the desired reduction in the Central Government fiscal deficit over the medium term and in reducing the key risks in fiscal marksmanship (different between actual outcomes and budgetary estimates as a proportion of GDP). The Survey underlines that addressing the key fiscal risk of petroleum subsidies is critical in better fiscal marksmanship. “ With recent reforms in diesel prices and efforts at expenditure reprioritization, the medium term fiscal consolidation plan is credible and could yet again yield macro economic dividends in terms of higher growth and price stability,” the Survey notes.

Source: PIB

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