7th Pay Commission: Inflation could offset salary hike bonanza for Central government employees

The hike in salary for Central government employees and pensioners may turn out to be a short-lived joy given that rising prices of many commodities could negate the monetary benefits. The spike in inflation has been sharp in the past few months and could spell trouble for the Narendra Modi government also, besides disappointing 47 lakh employees and about 53 lakh pensioners.

Food inflation has been rising at a fast clip even before the impact of the salary hike could be felt. The disbursement of salary arrears for seven months happened only during the end of July while pensioners are yet to get their dues since the notification for retirees was issued only this month.

However, price rise has already gathered momentum in the past two months, with retail (CPI) inflation hitting a two-year high of 6.07 percent for July. Food price inflation rose even higher, to 8.35 percent. The spike was 27.53 percent for pulses, 21.91 percent for sugar and 14.06 percent for vegetables.

The data released on Tuesday shows that wholesale inflation (WPI) also scaled a 24-month high of 3.55 percent. Here too, food prices rose at a higher clip than the rest of the items forming part of the index. The wholesale prices of food articles climbed 11.82 percent on a year-on-year (YoY) basis, with the sharpest spike seen in pulses (35.76 percent) and vegetables (28.05 percent). Sugar prices skyrocketed 32.33 percent, YoY.

With the government yet to decide on quantum of hike in allowances, it is difficult to gauge the inflation trajectory once the disbursements start, apparently in November this year.

The Reserve Bank of India (RBI) has repeatedly raised concern over the effect of pay commission outgo on inflation.

"The prospects for inflation excluding food and fuel are more uncertain; if the current softness in crude prices proves to be transient and as the output gap continues to close, inflation excluding food and fuel may likely trend upwards and counterbalance the benefit of the expected easing of food inflation. In addition, the full implementation of the recommendations of the 7th central pay commission (CPC) on allowances will affect the magnitude of the direct effect of house rents on the CPI," RBI governor Raghuram Rajan said in his third bi-monthly monetary policy statement on August 9.

For those who are employed in the private sector or in the unorganised sector, the impact will be even sharper as they are unlikely to get the cover enjoyed by government employees. If the clamour among state government employees picks up, their (state governments') fiscal calculations are bound to take a hit. For poll-bound states such as Uttar Pradesh, Goa and Punjab, it will be a tough balancing act, of keeping employees happy and ensuring fiscal prudence.

Source : http://www.ibtimes.co.in/