Tarun Reflex

August 29, 2008

6th Pay Commission will have no impact on India’s Economy

Contrary to widespread misperception that 6th Pay Commission will have adverse impact on India’s economy, a report says that it wouldn’t have any negative impact. The report comes at a time when many economists and analysts both with India and abroad had said that it will be increase deficit and may aggravate inflation.

Central government that is all set to issue notification for the implementation of the pay panel recommendations must have heaved a sigh of relief over the finding of Fitch Ratings India.

The Fitch Ratings India’s finding totally negates the economists who had been ranting that it will be counter productive for the nation and that it will be very difficult for the country to absorb the financial impact of the increased pending on the pay panel implementation.

Around 5.5 million central government employees are going to benefit from the pay panel recommendations. A larger number of state government employees too will benefit from the recommendations if their respective state governments implement the recommendations.

It is estimated that the wage hike would increase the financial implication for the Centre by Rs 17,798 crore annually and the arrears with effect from January 2006 would cost Rs 29,373 crore, Information and Broadcasting Minister P R Dasmunsi told reporters after the Cabinet meeting. The financial implication of Pay Commission on the General Budget would be Rs 15,717 crore and Rs 6414 crore on Railway Budget in 2008-09. The government’s present salary bill is over Rs 70,000 crore and the pension bill is over Rs 30,000 crore.

Dr Devendra K. Pant of  Fitch Ratings India says, “In 1997, the fiscal situation was grimmer for Indian states when increased expenditure on wages and salaries resulted in increased borrowing, engulfing some states in a fiscal crisis and trapping them in a vicious cycle of debt”.

He says that the country was in a far stronger economic condition and that it has the ability to absorb such government largesse. “Now, there is a marked difference in present growth and the states’ fiscal situations. Even with a forecasted slowdown in FY09, economic growth is expected to be 7.7%, whereas economic growth in FY97 was a comparatively meager 4.3%” he says.

Another Fitch official says, “Fitch considers that buoyancy in VAT collection and continued tax buoyancy would help states manage the negative impact of the pay revision on their finances”.

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