7th Pay Commission to be implemented from January 2016, arrears to be paid

New Delhi: In a bonanza, one crore government employees and pensioners will get a 2.5 times hike in basic pay and pensions under the 7th Pay Commission recommendations that will cost the exchequer annually Rs 1.02 lakh crore, which the government says will have a multiplier effect on economy.

The new scales of pay provide for entry-level basic pay going up from Rs 7,000 per month to Rs 18,000, while at the highest level i.e. Secretary, it would go up from Rs 90,000 to Rs 2.5 lakh. For Class 1 officers, the starting salary will be Rs 56,100.

The Union Cabinet today accepted the recommendation of Justice A K Mathur headed panel due to which there would be a recurring burden of Rs 72,800 crore every year, while the current fiscal's burden would be Rs 84,933 crore in view of the fact that they would be implemented from January 1, 2016.

While the Cabinet in its meeting, chaired by Prime Minister Narendra Modi, accepted the recommendations in respect of the hike in basic pay and pension, a decision on its suggestions relating to allowances has been referred to a Committee headed by Finance Secretary.

Read: Cabinet approves 7th Pay Commission recommendation of 23% salary hike

Announcing the government's decision, Finance Minister Arun Jaitley said government salaries have to be respectable in comparison to private sector, for which the Commission had engaged IIM-Ahmedabad for making a comparison.

"The recommendations of the Pay Commission with respect to pay and pension, have been accepted by and large by the government. And those recommendations will be implemented with effect from January 1, 2016, and the arrears would also be paid in this year," he said.

The recommendations cover 47 lakh central government employees and 53 lakh pensioners. This include 14 lakh serving employees and 18 lakh pensioners in defence forces.

Allaying fears of government's fiscal maths going wrong, Jaitley said the budget has provided for the anticipated expenditure and it did not come as a surprise.

Read: Cabinet clears pay hike for 1 crore govt employees, pensioners

Concerns have also been expressed over the extra money in the economy pushing up inflation. The minister admitted that there will be some inflationary pressure.

Maintaining that government cannot grudge a hike in salary for government staff after 10 years, he said, "when people get more money, it comes back in the system in the form of taxation. Savings will increase ... spending will go up".

The Pay Commission had recommended abolition of 53 out of 196 allowances that the government employees currently get and moderation in several others.

The scrapping of the allowances was opposed by the Unions and so it has been referred to a Committee of Secretaries.

The once in a decade pay hike has seen burden on exchequer rise from Rs 17,000 crore in the 5th Pay Commission to Rs 40,000 crore in the 6th and Rs 1,02,100 crore in the 7th Pay Commission, Jaitley said.

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While the Cabinet approved the Commission's recommendation of enhancing ceiling of house building loan from Rs 7.5 lakh to Rs 25 lakh, the suggestion of deducting Rs 1,500-5,000 per month towards group insurance was not accepted. Rate of annual increment has been retained at 3 per cent.

Also interest free advances for medical treatment, travel allowance and LTC have been retained. "All other interest free advances have been abolished," an official statement said.

For armed forces, gratuity ceiling has been doubled to Rs 20 lakh and it would increase by 25 per cent whenever Dearness Allowance rises by 50 per cent.

Jaitley said the Cabinet has brought about a parity between defence personnel and Combined Armed Police Forces by providing an additional indexation. "Government salaries have to come to at a respectable level so that the government is able to attract the best talent. Not necessarily in civil services alone but also other services and therefore irrevocable consequence of this would be a pressure on the Budget along with OROP recommendations," Jaitley said.

He said since there will be more money in the market to spend, it will generate more demand, that will help push economic growth. Also additional savings will help economy, but in the flip side more money supply will lead to "inflationary pressure".

The Minister also announced Constitution of a separate committee to look into anomalies arising out of the implementation of the 7th Pay Commission recommendation. Another panel would be set up to suggest streamlining the implementation of the National Pension System.

After the Cabinet meeting, Jaitley had tweeted that it was a "historic" increase for government employees. "Congratulations to central government officers, employees & pensioners on a historic rise in their salary & allowances through the 7th CPC (Central Pay Commission)," he tweeted.

At the press briefing he said the government took just six months time to implement the 7th Pay Commission recommendations, as against 19 months taken to implement fifth Pay Commission and 32 months for the sixth.

The 7th Pay Commission had in November last year recommended an average 14.27 per cent hike in basic pay at junior levels, the lowest in 70 years. The previous 6th Pay Commission had recommended a 20 per cent hike which the government doubled while implementing it in 2008.

After including allowances, the hike in remuneration proposed by the 7th Pay Commission came to 23.55 per cent.

Jaitley said that the government intends to pay arrears for six months within the course of this year. "When you spend there is taxation, demand is also generated. When you save that, savings is used in development of the country. It also has some inflationary pressure. So the extra money also comes back into the system which increases size of economy. We don't have any option," he said.

On the strike threat by certain unions, Jaitley said after the 7th Pay Commission award the salaries of government employees have surpassed those in private sector. "After implementation of 7th Pay Commission report, government salaries are distinctively higher than the market salaries and the private sector salaries. So, there is no logic in opposing it," he said.

Of the Rs 84,933 crore additional burden on the exchequer in the current financial year, Rs 60,608 crore would be on the general budget and the remaining Rs 24,325 crore on the railways.

While the Pay Commission applies to central government employees, state governments usually follow suit and emulate the revision in salaries. There is a separate Pay Commission for deciding on salaries of central PSU employees.