The Union Cabinet approved the implementation of Seventh Pay Commission recommendations yesterday.  The Commission was tasked with reviewing and proposing changes to the pay, pension and efficiency of government employees.

These recommendations will apply to 33 lakh central government employees, in addition to 14 lakh armed forces personnel and 52 lakh pensioners.  This will take effect from January 1, 2016.

Pay, Allowances and Pension of central government employees

In relation to an employee, the Commission proposed to increase (i) the minimum salary to Rs 18,000 per month, and (ii) the maximum salary to Rs 2,50,000 per month.

It also recommended moving away from the existing system of pay bands and grade pay, which is used to determine an employee’s salary.  Instead, it proposed a new pay matrix which will take into account the hierarchy of employees, and their pay progression during the course of employment.  The Commission also suggested that this matrix should be reviewed periodically, with a frequency of less than 10 years.

The Pay Commission also suggested a linkage between performance and remuneration of an employee.  For this, it proposed the introduction of performance related pay which will be based on an annual appraisal of the employee.  In addition, it recommended that annual increments of an employee should be withheld, if he is unable to meet the benchmark required for regular promotion or career.

The Commission also sought to abolish or merge some of the allowances that may be given to employees by various government departments.  It suggested that, of the 196 allowances that exist, 52 should be abolished and 36 should either be merged under existing heads, or be included under proposed allowances.  Some of these allowances involved payment of a meagre amount of close to Rs 100 per month.

In addition, the rates of House Rent Allowance (HRA) were revised.  The Commission proposed a methodology to increase the HRA rates every time the Dearness Allowance given to employees increased to 50% or 100%.  Dearness Allowance is given to employees in lieu of increases in the cost of living, on account of inflation.

The Commission had also proposed new methodology for computing pension for pensioners who retired before January 1, 2016.  This is aimed at bringing parity between past and current pensioners.  As part of the new methodology, two options for calculation of pension have been prescribed, and the pensioner may opt for either one.

Financial Impact on the government

The implementation of the Seventh Pay Commission recommendations is expected to cost the government Rs 1,02,100 crore.  Of this amount, 72% will be borne by the central government, and 28% by the railways.

As a result, the overall expenditure is expected to increase by 23.6%, with a 16% increase in expenses on pay, 63% in allowances and 24% in pension.

Addressing the issue of vacancy

As of 2014, the central government had a job vacancy of 18.5% (for a department-wise break-up see Figure 3).[i]  These vacancies may need to be filled or abolished, if required, to reduce redundancy.[ii]

It may be noted that the Second Administrative Reforms Commission had observed that reducing the number of government employees is necessary for modern and professional governance.  Further, it had expressed concern that the increasing expenditure on salaries of government employees may be at the cost of investment in priority areas such as infrastructure development and poverty alleviation.[iii]

Inducting specialised personnel in the government

The Second Administrative Reforms Commission had also observed that some senior positions in the central government require specific skill sets (including technical and administrative know-how).[iii] One way of developing these skill-sets is to recruit personnel directly into these departments so that they can over a period of time develop the required skills.  For example, personnel from the Central Engineering Service (Roads) may aspire and be qualified to hold senior positions in the Ministry of Road, Transport and Highways or a body like the National Highways Authority of India.

However, another view is that special skill-sets may be inducted in the government through lateral entry of experts from outside government.  This will allow for widening of the pool of candidates and greater competition for these positions.[iii] The Second Administrative Reforms Commission had also recommended that senior positions in the government should be open to all services.

The last Pay Commission’s recommendations, in 2008, led to an increased demand in the automobile, consumer products and real estate related sectors.  With the Seventh Pay Commission’s recommendations expected to take effect from January 1, 2016, their impact on the economy and the consumer market will become known in due course of time.

[i] Report of the Seventh Central Pay Commission, Ministry of Finance, 2015 http://finmin.nic.in/7cpc/7cpc_report_eng.pdf.

[ii] “Union govt has 729,000 vacancies: report”, Live Mint, November 30, 2015, http://www.livemint.com/Home-Page/X6U6xFe5oR2pW4simMmAhK/Union-govt-has-729000-vacancies-report.html.

[iii] 10th and 13th Reports of the Second Administrative Reforms Commission, 2008 and 2009.