Commissioned to Pay

Can we expect more than 25% increase in real wages for the Armed Forces other than hiked allowances? Sheer Statistics in economics is mind blowing!

Earlier Recommendations
Fifth Pay Commission in 1997 had a devastating effect on India's fiscal finances. The fault lay not with the recommendations but with tardy implementation. The commission had recommended large pay hikes, but also advised that the hikes should be linked to downsizing of pay scales and the workforce, abolishing vacant posts and adopting a performance linked pay structure. The government in power at the time accepted the recommendation related to pay hikes, but ignored the implementation of the other politically sensitive recommendations.

Net Result
This had twin effects. First, it resulted in a massive 30 percent increase in salary for all the central government employees. Second, it impelled state governments to implement similar hikes. The net result was a sharp rise in the share of general government wages and salaries from 5 per cent of GDP in 1996 to 6.4 per cent in Financial Year 2000, a doubling of pension payments from 1 per cent to 2 per cent of GDP and a sharp surge in the fiscal deficit from 6.5 per cent to 9.5 per cent of GDP during the same period. Some states were unable to meet these commitments and had to borrow to pay salaries.

Present Pay Commission
The Sixth Pay Commission poses a more medium term, but serious, risk to the fiscal outlook. If the Sixth Pay Commission recommends 200% hikes, and if they are implemented, the total wage and pension bill of the combined central and state governments could increase from 5.8 per cent of GDP in Financial Year 2008 to 7.6 per cent by Financial Year 2012. The impact is likely to be spread over 2 to 3 years as the hikes will be effective Financial Year 2009 for central government employees and 2010 for state government employees and a number of salary arrears will be cleared only in a phased manner. In this scenario, it can be estimated that the total fiscal deficit could surge to about 7.5 per cent of GDP by 2012.

Expectations
We expect election spending to widen the consolidated fiscal deficit in 2009 to 6 per cent of GDP, but luckily this deterioration will be temporary and that robust GDP growth and further fiscal reforms will narrow the deficit to 5.2 per cent of GDP by 2012 hopefully as predicted by financial pundits. With this background can we predict the real increase in salaries for the Armed Forces and Ex- Servicemen?
Sixth Pay Commission