Formed by the United Progressive Alliance Government, the Pay commission is currently head by Justice AK Mathur since February 2014. Once accepted, the recommendations will be in effect from 1st January, 2016. The Pay Commission main role is to revisit the pay scale of the government employees and the recommendations it offers are often accepted by the states after few tweaks.
The 7th Pay Commission has recommended that the allowances, pensions and pays of government staff along with the pensioners will be seeing an increase of 24 percent approximately from January 2016. This will be quite lower compared to the last recommendation from the 6th Pay Commission which recommended a whopping 40% increase back in January 2006. It is worth noting here that if the recommendations are accepted, the salaries and pensions alone will take 2.2% of the total GDP of India.
This increase in government salaries is said to increase the consumption in the country whereas will help in turn increase revenues and profits of corporate sector. However experts believe that many corporates will also lose as the aggregate impact of the increase may not be that large as expected. If consumer goods industry is to get any gains, it is a given fact that capital goods will lose resulting in a negative effect on the economy.
The pay commission has the power to redo the state employees pay every ten years. The process starts with the central government employees, then the state governments and ends with universities. There is a five year wage cycle when it comes to salaries at state run institutions. It was the last pay commission that made the recommendation that revisions should remain effected for at least 5 years. But this was not followed this year as the new commission has made the revised salaries recommendation to take effect by 1st of January.
It is understood here that the government doesn’t has any money but will acquire from others. What this means is that the government cannot raise the costs from one side without taking money from another place. So if the recommendation for an increase of 23.55% is to be accepted, this would mean that the salaries and pensions would have to be paid from another source. The aggregate demand will therefore not rise in India. However things would have been quite different had the GST been cleared as well in the recommendations by the 7th Pay Commission.