7th CPC Report: General Economic Situation and Financial Resources of the Central Government
Section-II
2.1.12 With the above framework in place we can now assess the extent to which the Seventh Central Pay Commission’s recommendations address macroeconomic conditions, the need for fiscal prudence and availability of adequate resources for development and welfare expenditures. Table 2 presents different categories of PAP expenditures as percentages of GDP over time. It is clear from the table that pay and allowances as a proportion of GDP has remained fairly stable since 2010-11, i.e., in the range of 1.8 percent and 2.0 percent, as has the share of pensions, which has ranged between 0.9 percent and 1 percent of GDP.
2.1.13 The Seventh CPC recommendations can cause macroeconomic stress in two ways:
1. The awards of the previous Pay Commissions, both V as well as the VI, involved payment of arrears. If awards are made with an arrears component then the cumulative impact of arrears would temporarily increase government expenditure on PAP, thereby causing an appreciable shock, albeit for a short time. This shock impacts both fiscal stability and the price level through demand and supply channels. However, the Seventh CPC recommendations entail, at best, payments of marginal arrears and we do not therefore envisage any macroeconomic shock on this score.
2. A pay commission award can cause a significant increase in the ratio of PAP to GDP in the year the award is implemented. This happens for two reasons:
2.1.14 As we show in Table 2 the cumulative effect of these elements on the award of the VI CPC was of the order of 0.77 percent of GDP in 2009-10. This Commission is of the view that any macroeconomic impact that exceeded this number would not be fiscally prudent and would put undue pressure on the government in terms of discharging its development and welfare spending responsibilities. Table 2 shows the impact of the proposed recommendations of the Seventh CPC. In arriving at an assessment of the impact, three Scenarios have been considered. Scenario I represents a “business as usual” scenario i.e., a situation that we estimate would prevail in the absence of the pay commission award. Scenario II represents the net impact on the PAP-GDP ratio if the Commission were to only merge basic pay and DA. Scenario III
represents the full impact of the Seventh CPC’s recommended award on the PAP-GDP ratio.
2.1.15 The merger of basic pay with DA would need to be effected in the sense that this merger is inevitably carried out when Pay Commissions submit their recommendations. The net increase as a consequence of the pay commission recommendations is therefore the difference between the PAP-GDP ratio in Scenario III and Scenario II i.e., 0.56 percent. The Commission is of the view that this represents an extremely reasonable increase in the PAP-GDP ratio in the initial year of award. In future years this ratio will in fact decline, as GDP growth is expected to be faster than the growth rate of inflation in future years as projected by the government and as explained in Section-I above.
2.1.16 The total impact of the Commission’s recommended award is also less than that of the VI CPC. As can be seen from Table 2, the increase in PAP-GDP ratio (excluding arrears) in the case of the VI CPC was 0.77 percent of GDP as compared to 0.65 percent (the difference between the PAP-GDP ratio in the year following the award period) in the case of the Seventh CPC’s recommendations.
2.1.17 In assessing the impact on the capacity of the government to maintain its expenditure on welfare and development commitments, it would be incorrect to simply look at the ratio of PAP to total revenue expenditure. This is because the railways are expected to meet their PAP commitments from their own internal resource generation and therefore it is not appropriate to include the railways component of PAP in our calculation. We have therefore calculated the increase in the share of PAP in total revenue expenditure (excluding railways) in the two years following the VI CPC award and compared this with our estimated increase in this ratio in the year following our award, if the Seventh CPC recommendations are accepted.
2.1.18 We find (Table 2) that the rise in estimated share of PAP in total revenue expenditure (excluding Railways) as a consequence of the Seventh CPC recommended award will be 4.25 percent which is lower than the corresponding figure for the VI CPC award which is 4.32 percent (Table 2).
2.1.19 The Commission has not made any assumptions regarding efficiency savings, which will no doubt be effected as part of the overall government strategy for enhancing administrative efficiency, and following implementation of the report forthcoming from the Expenditure Management Commission. If these reforms are credible, one would expect efficiency gains to more than pay for these modest increase in the PAP-GDP and PAP (excluding railways)/RE ratios. Thus, we feel that the macroeconomic impact of the recommendations is in conformance with the need for fiscal prudence and macroeconomic stability.
Assumptions
Gross Domestic Product
2.1.20 The central statistical organization (CSO), Ministry of Statistics and Programme Implementation (MOSPI) has released the new series of GDP with base year 2011-12 with revisions in methodology of estimating national income3. However, at the time the calculations for this chapter were made, the CSO had not released the back series of GDP based on the new base year. The CSO, in its press release (see footnote below), stated, “…Improvements as noted above, especially incorporation of new datasets, have resulted in a correction in the level of GDP, which is likely to affect a wide range of indicators where it is used as a reference point:
for instance, trends in public expenditure, taxes and public sector debt that are conventionally analysed in terms of their ratios to nominal GDP. It may be noted that the level of revision in the present base revision is not large enough to affect any of these ratios significantly….” In the annexure attached to the press release it indicates changes in GDP at the aggregate level.
2.1.21 After consultation with the Chief Statistician of India, MOSPI, we created the back series of GDP with new base year assuming that the gap between the two series at the new base year will remain at least constant for previous years. In addition, we also calculated the impact of Seventh CPC award with the old GDP series for the year 2015-16 and 2016-17 by using the nominal growth rate of the new series for these two years. The impact of pay and allowances on GDP under both series is thereby analysed and the difference between the estimates of two series is minimal.
2.1.22 Further, in case of new series, while projecting the GDP for 2016-17, we assumed that the real growth rate of GDP will be 7.5 percent and inflation will be 4 percent in 2016-17.
Pay and Allowances
2.1.23 The actual data from Finance Accounts of India for pay and allowances and pensions is available till 2013-14. We, therefore, projected the data from 2014-15 onwards with an annual growth rate of 11.07 percent (an average of PAP from 2011-12 to 2013-14).
Pensions
2.1.24 The share of pensions in total PAP has been stable since 2009-10. Thus, we maintained the same share while estimating the projections for pensions for 2016-17 and estimated the total pensions under different scenarios as in the case of pay and allowances.
Expenditure
2.1.25 To assess the impact of Seventh CPC award on Central finances, we considered the total expenditure and revenue expenditure projections made by FFC. We also analysed the impact using the Budget estimates for 2015-16. The budget estimates for 2016-17 were projected, using the projections made by FFC for 2016-17 over 2015-16.
Section-II
2.1.12 With the above framework in place we can now assess the extent to which the Seventh Central Pay Commission’s recommendations address macroeconomic conditions, the need for fiscal prudence and availability of adequate resources for development and welfare expenditures. Table 2 presents different categories of PAP expenditures as percentages of GDP over time. It is clear from the table that pay and allowances as a proportion of GDP has remained fairly stable since 2010-11, i.e., in the range of 1.8 percent and 2.0 percent, as has the share of pensions, which has ranged between 0.9 percent and 1 percent of GDP.
2.1.13 The Seventh CPC recommendations can cause macroeconomic stress in two ways:
1. The awards of the previous Pay Commissions, both V as well as the VI, involved payment of arrears. If awards are made with an arrears component then the cumulative impact of arrears would temporarily increase government expenditure on PAP, thereby causing an appreciable shock, albeit for a short time. This shock impacts both fiscal stability and the price level through demand and supply channels. However, the Seventh CPC recommendations entail, at best, payments of marginal arrears and we do not therefore envisage any macroeconomic shock on this score.
2. A pay commission award can cause a significant increase in the ratio of PAP to GDP in the year the award is implemented. This happens for two reasons:
a. Due to the fact that many allowances are not fully indexed to DA, and some allowances are not indexed at all, there is some increase in expenditure on PAP that happens when basic pay and DA are merged.
b. Total government spending on PAP increases due to an increase in the real value of PAP as a consequence of a pay commission award.
2.1.14 As we show in Table 2 the cumulative effect of these elements on the award of the VI CPC was of the order of 0.77 percent of GDP in 2009-10. This Commission is of the view that any macroeconomic impact that exceeded this number would not be fiscally prudent and would put undue pressure on the government in terms of discharging its development and welfare spending responsibilities. Table 2 shows the impact of the proposed recommendations of the Seventh CPC. In arriving at an assessment of the impact, three Scenarios have been considered. Scenario I represents a “business as usual” scenario i.e., a situation that we estimate would prevail in the absence of the pay commission award. Scenario II represents the net impact on the PAP-GDP ratio if the Commission were to only merge basic pay and DA. Scenario III
represents the full impact of the Seventh CPC’s recommended award on the PAP-GDP ratio.
2.1.15 The merger of basic pay with DA would need to be effected in the sense that this merger is inevitably carried out when Pay Commissions submit their recommendations. The net increase as a consequence of the pay commission recommendations is therefore the difference between the PAP-GDP ratio in Scenario III and Scenario II i.e., 0.56 percent. The Commission is of the view that this represents an extremely reasonable increase in the PAP-GDP ratio in the initial year of award. In future years this ratio will in fact decline, as GDP growth is expected to be faster than the growth rate of inflation in future years as projected by the government and as explained in Section-I above.
2.1.16 The total impact of the Commission’s recommended award is also less than that of the VI CPC. As can be seen from Table 2, the increase in PAP-GDP ratio (excluding arrears) in the case of the VI CPC was 0.77 percent of GDP as compared to 0.65 percent (the difference between the PAP-GDP ratio in the year following the award period) in the case of the Seventh CPC’s recommendations.
2.1.17 In assessing the impact on the capacity of the government to maintain its expenditure on welfare and development commitments, it would be incorrect to simply look at the ratio of PAP to total revenue expenditure. This is because the railways are expected to meet their PAP commitments from their own internal resource generation and therefore it is not appropriate to include the railways component of PAP in our calculation. We have therefore calculated the increase in the share of PAP in total revenue expenditure (excluding railways) in the two years following the VI CPC award and compared this with our estimated increase in this ratio in the year following our award, if the Seventh CPC recommendations are accepted.
Table 2: Impact of VI CPC and Seventh CPC Awards on Macro-fiscal Statement
(In percentage)
2.1.18 We find (Table 2) that the rise in estimated share of PAP in total revenue expenditure (excluding Railways) as a consequence of the Seventh CPC recommended award will be 4.25 percent which is lower than the corresponding figure for the VI CPC award which is 4.32 percent (Table 2).
2.1.19 The Commission has not made any assumptions regarding efficiency savings, which will no doubt be effected as part of the overall government strategy for enhancing administrative efficiency, and following implementation of the report forthcoming from the Expenditure Management Commission. If these reforms are credible, one would expect efficiency gains to more than pay for these modest increase in the PAP-GDP and PAP (excluding railways)/RE ratios. Thus, we feel that the macroeconomic impact of the recommendations is in conformance with the need for fiscal prudence and macroeconomic stability.
Assumptions
Gross Domestic Product
2.1.20 The central statistical organization (CSO), Ministry of Statistics and Programme Implementation (MOSPI) has released the new series of GDP with base year 2011-12 with revisions in methodology of estimating national income3. However, at the time the calculations for this chapter were made, the CSO had not released the back series of GDP based on the new base year. The CSO, in its press release (see footnote below), stated, “…Improvements as noted above, especially incorporation of new datasets, have resulted in a correction in the level of GDP, which is likely to affect a wide range of indicators where it is used as a reference point:
for instance, trends in public expenditure, taxes and public sector debt that are conventionally analysed in terms of their ratios to nominal GDP. It may be noted that the level of revision in the present base revision is not large enough to affect any of these ratios significantly….” In the annexure attached to the press release it indicates changes in GDP at the aggregate level.
2.1.21 After consultation with the Chief Statistician of India, MOSPI, we created the back series of GDP with new base year assuming that the gap between the two series at the new base year will remain at least constant for previous years. In addition, we also calculated the impact of Seventh CPC award with the old GDP series for the year 2015-16 and 2016-17 by using the nominal growth rate of the new series for these two years. The impact of pay and allowances on GDP under both series is thereby analysed and the difference between the estimates of two series is minimal.
2.1.22 Further, in case of new series, while projecting the GDP for 2016-17, we assumed that the real growth rate of GDP will be 7.5 percent and inflation will be 4 percent in 2016-17.
Pay and Allowances
2.1.23 The actual data from Finance Accounts of India for pay and allowances and pensions is available till 2013-14. We, therefore, projected the data from 2014-15 onwards with an annual growth rate of 11.07 percent (an average of PAP from 2011-12 to 2013-14).
Pensions
2.1.24 The share of pensions in total PAP has been stable since 2009-10. Thus, we maintained the same share while estimating the projections for pensions for 2016-17 and estimated the total pensions under different scenarios as in the case of pay and allowances.
Expenditure
2.1.25 To assess the impact of Seventh CPC award on Central finances, we considered the total expenditure and revenue expenditure projections made by FFC. We also analysed the impact using the Budget estimates for 2015-16. The budget estimates for 2016-17 were projected, using the projections made by FFC for 2016-17 over 2015-16.
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