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.