After inflation, weak global economy and falling exports, the implementation of the 7th Central Pay Commission's recommendations is the next key challenge for the Narendra Modi government. It's a double-edged sword for the government, and holds the key to its committment to fiscal discipline. 

On Wednesday, the Central government approved the setting up of a high-powered committee to assess the implementation of the panel's recommendations. The Union Cabinet, chaired by Prime Minister Narendra Modi, approved it on Wednesday.

The empowered committee of secretaries, which will be headed by the cabinet secretary, will look at the recommendations in an "expeditious, detailed and holistic" manner, the Central government said in a statement.

The 7th Central Pay Commission has suggested an average hike of 23.5% in pay and allowances for about 47 lakh Central government employees and about 52 lakh pensioners.

The recommendations are expected to cost the government Rs 1.02 lakh crore in the 2017 fiscal, and are likely to be implemented from 1 April, 2016, with retrospective effect from 1 January.

The panel was headed by Justice Ashok Kumar Mathur and included Vivek Rae, Rathin Roy and Meena Agarwal.

Major trade unions such as the Centre of Indian Trade Unions (CITU), Congress-affiliated All India Trade Union Congress (AITUC) and BMS are against the report, according to The Economic Times.

"We are opposing the report in totality as the real increase is just 16% and not 23.5% as is being proposed," said Pawan Kumar, zonal secretary of BMS. 

"It is totally disappointing... least hike (proposed) during the last 30 years. Considering the inflation, it is unsatisfactory," said AITUC general secretary Gurudas Dasgupta. 

The implementation of the pay panel's proposals will give a fillip to domestic consumption, driving growth, but on the flip side, the huge cost of implementation of the proposals will upset the government's fiscal calculations. 

Union Finance Minister Arun Jaitley is likely to make a statement on the implementation when he presents Budget 2016 next month.

The challenge will be in the form of managing retail inflation, which was 5.61% in December 2015, higher than the 14-month high of 5.4% registered in November 2015.

Rising prices, especially of food items, could backfire on the BJP during the year when four states — Assam, Kerala, Tamil Nadu and West Bengal — go to polls.

The cost of implementation could well upset the government's committment to rein in fiscal deficit to 3.9% of the GDP by the end of this fiscal and 3.5% by FY2017.

"While this year's targets are within reach on the back of strong non-tax collections and on-track spending, there is a risk that the FY16-17 fiscal consolidation is delayed," said Radhika Rao, Economist, Group Research, DBS Bank, in her note. 

The BJP expects to make inroads into these states so as to increase its strength in the Rajya Sabha, where it is in a minority and dependent on the Congress to get bills passed. The Congress has managed to stall the Goods and Services Tax (GST) Bill in the Rajya Sabha, citing the need for amendments.

If the rate of inflation breaches the 6% target set by the Reserve Bank of India for January 2016, it will restrict the apex bank's ability to cut interest rates, which will adversely affect the cost of borrowing for corporates and reduce the scope for rate cuts by lenders, who are already feeling the stress on their margins due to higher provisioning for bad loans. 

The gross NPAs of public-sector banks stood at 6.03% as of June 2015, up from 5.20% in March 2015. 

Some of the highlights of the 7th Central Pay Commission report:

  • It is clear from the table that pay and allowances as a proportion of GDP has remained fairly stable since 2010-11, i.e., in the range of 1.8 percent and 2.0 percent, as has the share of pensions, which has ranged between 0.9 percent and 1 percent of GDP.
  • The awards of the previous Pay Commissions, both V as well as the VI, involved payment of arrears. If awards are made with an arrears component then the cumulative impact of arrears would temporarily increase government expenditure on PAP, thereby causing an appreciable shock, albeit for a short time. This shock impacts both fiscal stability and the price level through demand and supply channels.
  • However, the Report of the Seventh CPC 12 Index Seventh CPC recommendations entail, at best, payments of marginal arrears and we do not therefore envisage any macroeconomic shock on this score.
  • A pay commission award can cause a significant increase in the ratio of Pay, Allowances and Pensions (PAP) to GDP in the year the award is implemented.
  • The personnel strength of the Railways, which accounted for 57 percent of total sanctioned strength in 1957, gradually declined to 40 percent in 2014. Defence Civilian and Communications segments have also witnessed decline in their share during the period.
  • ...the recruitment of civil Central Government personnel rose sharply from 2.87 lakh in the four year period 2006-2010 to 5.71 lakh in the four year period 2010 to 2014.
  • Railways and Police with a total recruitment of 4.63 lakh during the period 2010 to 2014 accounted for 81 percent of all new civilian recruits in the Central Government.
  • The Commission notes that on an average the intake of new civilian recruits in the Central Government during the period 2006 to 2014 has been slightly over a lakh each year.
  • Of the total 33.02 lakh civilian workforce 89 percent are in Group 'C', 8 percent are in Group 'B' and 3 percent are in Group 'A'.
  • While 89 percent of civilian Central Government personnel are in Group 'C', the Railways, Department of Posts and MHA have a significantly higher proportion in Group 'C' at 99 percent, 96 percent and 92 percent respectively.
  • Scientific and technical focused ministries/departments have a high percentage of Group 'A' Officers.
  • The total expenditure on pay and allowances for civil personnel of Central Government was Rs 1,29,599 crore for the financial year 2012-13. The maximum share was that of Indian Railways, at Rs 55,038 crore.
  • The expenditure of contractual manpower was Rs 300.49 crore in 2012-13.
  • There were 7,47,171 vacancies, or 18% of the sanctioned strength, as of 1 January, 2014.
  • Of the 33 lakh persons employed, 9.47 lakh employees were above 50 years of age. Of these, 4.93 lakh employees were working in Indian Railways.
  • After considering all relevant factors and based on the Aykroyd formula the minimum pay in government is recommended to be set at ₹18000 per month.
  • The Commission does not agree with the demand of early implementation of revised pay structure and recommends that the date of effect should be 01.01.2016.
  • Unlike civil pensioners, amongst defence forces pensioners there is a large percentage of pensioners below the age of 60. Ten percent pensioners are below the age of 45 years, while 47 percent are between 45-60 years of age. Over 1.45 lakh, viz., 8 percent of defence pensioners, inclusive of family pensioners, are in age group of eighty and above.
  • The Commission recommends enhancement in the ceiling of gratuity from the existing ₹10 lakh to ₹20 lakh from 01.01.2016. The Commission further recommends, as has been done in the case of allowances that are partially indexed to Dearness Allowance, the ceiling on gratuity may increase by 25 percent whenever DA rises by 50 percent.
  • As mentioned earlier, this (the hike) represents an overall increase of 23.55 percent over the Business As Usual scenario. Of this, 23.94 percent increase will be in the General Budget, while 22.62 percent will be the increase in the Railway Budget.