Ever since the 7th Central Pay Commission (CPC) submitted its report last November, the spotlight has been largely on its benefit for Central government employees. State government employees hardly get a mention, except when they go on strike as Karnataka government staff did on June 2, 2016.
Till now, only one state — Odisha — has given a categorical commitment to implement the recommendations of the CPC, benefitting about four lakh employees and approximately three lakh pensioners.
But are states financially in a position to implement salary hike for their staff also, on the lines of the 7th CPC proposals?
In its 900-page report, the pay panel says it commissioned a study by the Indian Institute of Management, Ahmedabad (IIM-A) to assess the impact of the recommendations of the previous two commissions on the finances of the states.
The purpose was to get data on whether the states were in a position to entail huge financial outgo arising out of a hike in salary and allowances. The panel found that most states were in a position to absorb the impact in two financial years.
The broad conclusions of the study indicated that the states on the whole were able to manage their finances and absorb the fiscal shock caused by the VI CPC (relative to previous Pay Commissions) better, principally because of the implementation of the FRBM Act by the States
The empirical analysis conducted indicates that the macroeconomic impact on states' finances tends to taper off in two years in most cases. In this context, it is encouraging to note that states' finances continue to be reasonably sound at present," the CPC said.
The question that next arises is whether the states can absorb the impact of a hike to their employees on the lines of the CPC recommendations? One can draw inferences from the observations of the panel.
The Fourteenth Finance Commission has increased the ratio of states' share in the divisible pool of receipts to 42 percent from the 32 percent that obtained in the Thirteenth Finance Commission. States as a whole are expected to maintain this healthy trend, particularly since the macroeconomic outlook is now expected to be better than in the recent past.
"Ceterus paribus, one would expect this situation to remain, if not improve, in 2015-16. states' own revenues, as a percentage of Gross State Domestic Product (GSDP), are also stable at 7.7 percent for three years now.
Of course, not all states are positioned to absorb the impact as and when salaries are raised.
"In the case of States that have been in chronic revenue deficit there is no doubt that even the awards with the level of fiscal prudence of Seventh CPC will cause a fiscal strain to these states," the panel noted.
In conclusion, the CPC advises states to adopt a calibrated approach towards the issue of salary hike for employees, while exhorting them to practice fiscal prudence to absorb the impact on their exchequers.