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Budget Speech of Finance Minister says “7th Pay Commission impact may have to be absorbed in 2016-17″.

Until now, Government did not consider the demands of Central Government Employees such as grant of interim relief, DA merger with pay etc.  However after Budget Speech employees have got a ray of hope as it is indicated that Govt has started finding funds to meet out the outgo on implementation of 7th Pay Commission in 2016-17.

The following is an extract of Budget Speech 2015-16 in which the need for funds for implementing 7th Pay Commission and its impact on GDP.

Budget  2015-2016

Speech  of Arun Jaitley Minister of Finance

February 28,  2015

Fiscal Roadmap

23. I want to underscore that my government still remains firm on achieving the medium term target of 3% of GDP.  But that journey has to take account of the need to increase public investment.  The total additional public investment over and above the RE is planned to be `1.25 lakh crore out of which `70,000 crore would be capital expenditure from budgetary outlays.  We also have to take into account the drastically reduced fiscal space; uncertainties that implementation of GST will create; and the likely burden from the report of the 7th Pay Commission.  Rushing into, or insisting on, a pre-set time-table for fiscal consolidation pro-cyclically would, in my opinion, not be pro-growth.  With the economy improving, the pressure for accelerated fiscal consolidation too has decreased.  In these circumstances, I will complete the journey to a fiscal deficit of 3% in 3 years, rather than the two years envisaged previously.  Thus, for the next three years, my targets are: 3.9%, for 2015-16; 3.5% for 2016-17; and, 3.0% for 2017-18.  The additional fiscal space will go towards funding infrastructure investment.

***

In document to study Medium Term Fiscal Policy Statement for further 3 years: Para 12:-

MEDIUM TERM FISCAL POLICY STATEMENT

12. However, it is pertinent to note that the resource base of the Centre will be constrained following the implementation of the FFC. With steep jump in the sharing pattern of tax revenues, the revenues of the States, which is surplus in most of the cases, will be further augmented on one side and the Centre will face resource crunch in one of the difficult phases of consolidation underway. While, therevenues are constrained in the FY 2015-16, it would continue over the medium term framework in FY 2016-17 and 2017-18.

Moreover, the 7th Pay Commission impact may have to be absorbed in 2016-17. The phase of consolidation, extended by one year, will be also be spanning out in the period. Thus, in the medium term framework the fiscal position will continue to be stressed. However, with necessary corrections on the Plan side under the new paradigm of Centre-State fiscal relationship and reforms on the subsidies, with better targeting and policy initiatives, it is expected that over the medium framework much of the fiscal correction would have taken shape, leaving room for building up better fiscal management thereupon. The change is monumental; and needs dextrous manoeuvring in this initial phase.

(c) Pensions

42. The expenditure on pension payments of the Central Government includes both defence as well as civil pensions. Pension payment, in nominal terms was estimated at ` 74,076 crore in RE 2013-14 and at the year-end it was accounted at ` 74,896 crore. In BE 2014-15, pension payment in nominal terms was estimated at ` 81,983 crore. In RE 2014-15, it has been revised at ` 81,705 crore. The pension payment of Central Government for the past few years has been growing faster than the salary expenditure. The main reason for this is that there is an increase in number of pensioners due to higher retirements and increased life expectancy. In view of the likely impact of VII Pay Commission, Pension payment of the Government likely to be about 0.7 per cent of GDP in FY 2016-17 and FY 2017-18 respectively

**

In document to study Medium Term Fiscal Policy Statement for further 2 years:

FISCAL POLICY STRATEGY STATEMENT

Expenditure Management Commission:

37. While Government has managed to control the expenditure through rationalization in the fiscal consolidation phase, quality of expenditure remains an area that needs to be addressed. The ongoing fiscal consolidation has been successful in taming the fiscal deficit; however there is still imbalance in the public finance on the revenue side. As discussed in earlier section, concerted efforts are required to accomplish the target set for the revenue deficit and effective revenue deficit in the new FRBM regime. This entails structural changes in the Plan spending and definitive measures to contain Non-Plan spending within sustainable limits. Moreover, in the medium term, award of VII Pay Commission and XIV Finance Commission pose significant downside risk to Public Finance. Thus, time has come to look into the places where Government spends money and output achieved from it. Government will constitute an Expenditure Management Commission, which will look into various aspects of expenditure reforms to be undertaken by the Government.

MEDIUM TERM FISCAL POLICY STATEMENT

(c) Pensions

39. The expenditure on pension payments of the Central Government includes both defence as well as civil pensions. Pension payment, in nominal terms was estimated at ` 74,076 crore in RE 2013-14 and at the year end it was accounted at ` 74606 crore, marginally above the RE figure. In BE 2014-15, pension payment in nominal terms estimated at `81,983 crore. The pension payment of Central Government for the past few years has been growing faster than the salary expenditure. The main reason for this is that there is an increase in number of pensioners due to higher retirements and increased life expectancy. Accordingly, keeping past trend in view the Pension Expenditure of the Government has been projected to grow at 10.4 per cent in FY 2015-16. In view of the likely impact of VII Pay Commission, higher growth is assumed in FY 2016-17.

Source: India Budget

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National Council JCM , Staff Side has finalised its Memorandum to be submitted to 7th Pay Commission and it has been posted in its website NCJCMstaffside.com for all central government employees. The Full Final Memorandum consists 98 pages and the download link is provided below this post

Chapter —VII
Proposed Pay Structure and Rate of Increment

In the preceding chapters we have dealt with the various principles of pay determination as was enunciated by the successive Pay Commissions. The 6 CPC introduced the new concept of Pay Band and Grade Pay. We are not able to comprehend any logical methodology having been adopted by the 6th CPC in constructing the Pay Band and Grade Pay. In the ultimate analysis, we found that there had been no uniform multiplication factor. It varied from 2.2 time to 3. The changes effected by the Government while implementing the recommendations of the 6th cpc further compounded the confusion and making t more irrational and arbitrary. The 6 cPC in their report stated that they have upgraded certain pay scales having appreciated the contention made by the employees organizations. They merged certain other pay scales in an effort to delayering the functions. But the new pay that emerged from such upgradation/merger was not equivalent to the higher pay scales in the said group. For instance, the erstwhile pay scales of Rs.5000-8000, 5500-9000 and 6500-10500 were merged. The multiplication factor for pay band construction was 1.86 times of the minimum. Therefore the pay band for the pre merged pay scales was determined to begin at Rs.9300/-. Having merged, the pay band must have begun at 12,090/-, i.e. 1.86 times of 6500/- in which the other pay scales were merged.

7.2 The manner in which the Grade pay was devised is also questionable. At the lower level the Grade Pay progresses @ Rs.100/- ,i.e. 1800, 1900, 2000, etc. The pay in the Band + Grade Pay at the entry level is 5200 + 1800 = 7000. An employee is entitled for 3% increment every year. He gets a financial benefit of Rs. 210 every year on account an increment whereas on promotion his grade pay gets increased by just Rs.100/. only. The Grade Pay was devised at 40% of the maximum of the pre revised time scale of pay. The maximum of any time scale of pay will depend upon the rate of increment and the span of the scale of pay. The ratio between the minimum and the maximum of all pay scales was not uniform, rather it could not be uniform. Therefore, prescribing Grade Pay as a percentage of such variable maximum, in our opinion, was erroneous. Normally fitment benefit represent the gap between pre revised minimum and the revised minimum. The 6th CPC recommendation of Grade Pay did not serve this purpose also. Having been expressed in absolute quantum amount it gave varied benefit in different pay bands as also at different stages in the same pay bands.

7.3 The Grade Pay system brought about various anomalies, which were raised at the NAC but found no resolution despite discussions on several occasions in the last 6 years. We are of the firm view that the 7” CPC should revert to the Pay Scale System which has been time tested. We have constructed the pay scales maintaining the relativities with the time scale of pay suggested by both 5’ and 6th cPC•

7.4 While constructing the pay scales we have taken the rate of increments at 5% instead of 3% presently available. We have done so on the ground that most of the PSUs including the banking industries provide the incremental rate at 5% and over a period of time it raises the salary level of the personnel. We therefore request that the 7th CPC may recommend the rate of annual increment at 5%. Incidentally we may also state that the uniform date of increment prescribed by the 6th CPC has encountered certain problems and anomalies. We, therefore, suggest that the 7th cpc may recommend, for administrative expediency, two specific dates as increment dates, Viz. 1st January and 1st  July. Those recruited/appointed/promoted during the period between l January and 30th June will have their increment date on 1stt January and those recruited/appointed/promoted between 1st July and 31st December will have it on 1st  July next year. This apart we request the Commission to specifically recommend that those who retire on 30th June or 31St December are granted one increment on the last day of their service.

7.5 We have also felt that a further reduction in the number of pay scales is needed. While constructing the pay scales we have removed those pay scales pertaining to Grade Pay of Rs.1900, 2400, 4600, 8700 and the scale of pay of Rs. 75500-80000. We are of the opinion that the instrument of Special Pay which was in operation earlier should be brought back to address the need of intermediary grades in certain organizations. The Associations and Federations representing the employees and officers of various departments and various categories will submit their memorandum indicating the pay scales to be assigned to the categories of the employees and officers they represent taking into account the nature of functions assigned to those categories separately.

7.6 Presently, functional promotion is made to the next hierarchical position whereas MACP promotion ¡s Grade Pay based, irrespective of the fact whether a particular Grade Pay exist in the hierarchy or not in the concerned department. Our suggestion to reduce the number of pay scales go a great extent to obviate the difficulty encountered due to the dual system of promotion.

7.7 We have constructed open- ended pay scales. This is to ensure that no employee stagnates without increment. The pay of the Secretary and the Cabinet Secretary has been kept as a fixed amount as has been the recommendation of the 6th CPC. In consonance with our view on the need for further de-layering, we have suggested only 14 Pay scales indicating in the table the minimum of each of them. The said 14 pay scales are given below:

In Table 7.2, the corresponding pay scales of the 6” CPC recommended Grade Pay are given for reference.

Table No. 7.1.

Proposed pay scale minimum.

Table 7.2.

New Pay scale minimum

Download :FULL-FINAL-Memorandum of NC JCM

Source : NC JCM Staffside.com

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Sources close to the Central Government Employees Federations told that Merger of 50% DA will soon be considered by Central Government before the budget session of Parliament in February 2014. According to the sources, the central government is likely to consider the central government employees  demand for merging of 50 % DA, for the reason that the DA will be crossing 100% level after January 2014.
The rate of dearness allowance to be paid to govt servants has been increasing consistently due to the rise in the prices of essential commodities for the past two years. In 2011 the rate of DA was at 50 % level. Since then all the Federation demanded the central government to merge the 50 Percent DA with basic Pay. But the government did not accept this demand to merge the DA with basis pay, as it was not recommended by sixth CPC.

The demand would be considered in view of parliament elections

But federations kept on demanding the government that raising dearness allowance alone will not help to compensate the alarming rate of price rice. So they urged the government to consider their demand favorably. It is believed that after the defeat in the election of four state legislative councils, the UPA government has decided to reconsider about its decision on the issues which directly affects the common public. The high command of the ruling party thought that the reason for their defeat in the state election is mainly because of their government failed to contain the price rise. The gap between common public and UPA government has been considerably increased. To correct these failures the UPA government decides to do something to attract the voters.

After announcing the government’s proposal to constitute the 7th pay commission, the community of central government employees has been convinced to have soft view on this government. Further the 50 lakh central government employees would be made happy if the 50% DA is merged with Basic Pay. It is told that , as the central government staff association and federations demanding it very seriously, in case the government decides go with this demand, there will be around one crore voters will be in favour of UPA government. So the government may consider the demand of merging of 50% DA with basic Pay in view of forthcoming Parliament elections.

Allowances will have no impact on merging DA with basic Pay

The sources, associated with National Council JCM, said that the government initially was not willing to consider this demand as some allowance and advances have been raised by 25% whenever the DA crosses 50% level as per the sixth CPC recommendation. But federations insisted that the allowances, which are raised to 25 % level when DA crosses 50%, will have no impact on merging DA with basic pay. The only allowance will have an increase when Basic Pay increases are HRA. No other allowances will be increased and other entitlement of the respective Grade Pay will not be revised as the 50% DA to be merged will be kept under separate component like it was treated in 5CPC as Dearness Pay. “There is no need to worry about financial implications, as the 50% DA will be paid by just changing its nomenclature as Dearness Pay”, said sources.

50% DA merger to be declared before DA crosses 100%

Further, it has been informed that it is good enough for the government to announce its decision before declaring the next additional installment of DA. Because the AICPIN for Industrial workers for the Month of December 2013 is awaited to determine the rate of dearness allowance to be paid from January 2014.The result of last 11 months AICPIN shows that DA will definitely be raised by 10 % from existing 90% level. So the rate of DA will be 100% with effect from 1st January 2014. After the DA increased to 100%, the demand for 50% DA merger will have to change its avatar. Probably the demand would be for 100% DA merger. So the federations expect the government may consider 50% DA merger soon.

However, decision if any in this regard should be taken before the announcement of election for parliament. It is expected that election announcement for parliament will be made by the end of February 2014. Before that,  the announcement of 50% DA merger is expected from central government.

Source: gservants.com
[http://www.gservants.com/2014/01/15/merger-50-percent-da-may-soon-considered-central-government-sources/]

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On September 25, the government of India announced the constitution of the seventh central pay commission. While the central pay commission’s (CPC) recommendations are applicable to central government employees’ salaries, the salaries of all state government and local bodies (municipal corporations, etc) employees are revised after central government’s acceptance of recommendations of the CPC.
The first CPC was constituted in May 1946. It was based on the idea of giving the employees living wages that suit the conditions of the day, qualified by the condition that in no case should be a man’s pay be less than a living wage. The second pay commission stated that the pay structure and the working conditions of the government employees should be crafted in such a way that efficient functioning of the system is ensured by recruiting persons above or with a minimum qualification.
Cost of living and type of economy are two major factors behind the pay commission award. India is moving towards a market economy and the government has to compete with the private sector to attract talent, and hence, offer competitive salaries.
The government generally accepts all recommendations of pay commissions regarding increase in salaries. However, it skirts hard decisions such as down-sizing/right-sizing of the government, linking the efficiency/productivity of employee with future pay increase/promotions, etc. India is facing huge challenges of skilled manpower in various sectors, viz. education, technology, etc. What we need is right-sizing of the government to provide crucial services efficiently to the citizens.
Some states revise salaries of their employees on the basis of the recommendations of separate commissions/committees formed by them while some use the CPC recommendations. Salary revision of state government employees, generally, takes place with a lag from the revision of central government employees’ salaries. Two states, Karnataka and Kerala, follow schedules different from the central government’s for revising employees’ salaries, through their own salary revision committee/commission. Karnataka revised salaries of its employees on April 1, 2012; Kerala revised them last on July 1, 2009.
The salary revision, both at the central and state levels, takes place without factoring in the governments’ ability to absorb shocks of wage increase and the fiscal implications associated with it. Ceteris paribus, an increased wage bill enlarges the deficit and affects inflation, interest rates and growth prospects adversely. A higher wage bill increases government’s committed expenditure, which is impossible to adjust even in the medium-term. Increased consumption demand provides some support to growth. Generally, capital expenditure becomes the soft target of fiscal adjustment, affecting infrastructure creation and medium- to long-term growth prospects of the economy. Higher borrowing to finance current consumption and deficit leads economy to a structural weakness.
Salary revision based on the recommendations of the pay commissions in the past have taken place with retrospective effect (e.g., January 1, 1996, for the sixth CPC). Employees are paid arrears for the period between the date of salary revision and the date of first draw of the revised salary. This exerts pressure on the public finances of both central and state governments. One way of limiting the pressure would be to revise salaries frequently rather than every 10 years. The fourth CPC even recommended that there should be a permanent machinery to undertake periodic review of pay and allowances of central government employees. The government considered, but did not accept, this proposal.
Data on wage bill/salary of the central government is not available on comparable bases. However, CAG state audits and RBI’s annual publication, State Finances—A Study of State Budgets, make available some data on the wage bills of the states. RBI, in the same publication, provides annual data on non-developmental revenue expenditure under six different sub-classifications. The non-developmental revenue expenditure on organs of state, fiscal services, administrative services and pensions is taken as a proxy for a state government’s wage bill. The advantage of using this data is that it’s available for a fairly long period (1980-81 onwards). This period takes into account three different CPC awards—that of the fourth, fifth and sixth.
Salary revision has led to a rapid increase in the state governments’ wage bills in three previous instances. The average growth of states’ wage bill during 1987-88 to 1989-90 jumped to 21.3% from 13.5% during 1984-85 to 1986-87. The revenue account showed a deficit of 0.5% of the GDP from a surplus of 0.1% and the average fiscal deficit increased to 2.9% of the GDP from 2.8%. This clearly suggests capital compression for fiscal adjustment.
The fifth CPC award came at a time when economic growth was sound—the average growth during 1994-95 to 1996-97 was 7.2%. The average growth of the states’ wage bill during 1997-98 to 1999-00 shot up to 23.4% from 13.3% during 1994-95 to 1996-97. The average economic growth during 1997-98 to 1999-00 declined to 6.2% and revenue deficit ballooned to 2.1% of the GDP from 0.8%. While the revenue deficit deteriorated by 1.9 percentage points (pp) of the GDP, the deterioration in fiscal deficit was lower at 1.2 pp, suggesting adjustments in capital expenditure to accommodate salary revision and minimise fiscal slippage. A study by the World Bank concluded that the salary revision was mainly responsible for deterioration in the states’ fiscal profile.
The average growth three years before the sixth CPC was good (at 8.5% between 2006-07 and 2008-09). It fell marginally to 8.0% during 2009-10 to 2011-12. While the central government employees’ salaries were revised in 2008-09 for the state governments’, it started from 2009-10. The average growth of states’ wage bill during 2009-10 to 2011-12 was 20.8% vis-à-vis 16.4% growth during 2006-07 to 2008-09. The states’ aggregate revenue account showed a deficit (0.1% of GDP) during 2009-10 to 2011-12 from a surplus of 0.6% during 2006-07 to 2008-09. While the revenue balance deteriorated by 0.7 pp of GDP, the deterioration in fiscal deficit was at 0.3 pp, suggesting adjustment in capital expenditure to accommodate salary revision.
Some of the states severely impacted by the last salary revision (in line with the recommendations of the sixth CPC) were Assam, Bihar, Kerala, Maharashtra, Punjab, Tamil Nadu and West Bengal. Assam, Bihar, Kerala, Punjab and West Bengal have relatively weaker fiscal profile. Based on the experience of the last pay revision and the present fiscal situation, these states are more vulnerable and will find it difficult to absorb the adverse shock of a new pay revision. However, based on limited information available on the seventh CPC, the time lag between the effective date and implementation of the award will be less leading to a lesser amount of arrears compared to past salary revisions. To a certain extent, this would reduce adverse impact on state finances.

The author is chief economist and head-public finance, India Ratings and Research (Ind-Ra).

Views are personal

Source: http://www.financialexpress.com/news/pay-commission-shock-for-the-states/1182510/0

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