Union cabinet has approved the recommendations of seventh pay commission and this is another significant step taken by the central government after the implementation of One Rank One Pension (OROP). Though the flow of additional money to the economy may push the inflation but it will boost the domestic consumption also which will increase the growth. Unlike the earlier stances where arrears were paid in the subsequent financial years, the government has decided to pay the arrears w.e.f. 1st January 2016 in this financial year which may stress the fiscal deficit targets on account of additional outflow.
Pay commission is constituted by the government of India to review & recommend the wage structure and other matters related to employees like post-employment benefits, service conditions, promotion policy etc. First pay commission recommendation was implemented in 1946 and prior to that 1934 pay scales were continued.
Government sets up pay commission after an interval of 10 years to determine the salary/wages and other emoluments of the employees. Tenure of the commission is for 18 months within which it has to submit its report. Tenure of seventh pay commission was to expire on 31st December 2015 and it submitted its report in November 2015. The commission reaches out to various stakeholders for their inputs and gathers data from various ministries & departments for analysis. It also interacts with foreign governments to capture the global best practices.
The commission not only recommends the monetary compensation (i.e. pay increase) but also recommends the pay structure (e.g. seventh pay commission had examined 196 allowances and recommended to abolish 52 and subsume 36) and other facilities/benefits which can be in cash or kind. Overall objective of the commission is to come up with a recommendation on the compensation structure of the central government employees keeping in mind the global economic scenarios along with macro-economic environment of the country. Amongst other things monetary emoluments are necessary for the motivation of the staff as well as attracting/retaining the talented resources and therefore recommendations of the pay commission have significant importance. More than 1 crore employees (including defense and central armed police forces) and pensioners of central government are the beneficiary of the recommendations of seventh pay commission.
Apart from the pay increase based on the recommendation of the pay commission, central government employees also get dearness allowance (DA) to compensate the inflation. This dearness allowance is calculated on the basic salary and it is reviewed at every six months on the basis of consumer price index.
India has a history of labour unrest and it’s almost like a ritual for trade unions to call for strike when any announcement relating to pay hike or regulatory reform is made by the government. Industrial dispute results in loss of man-hours which impacts the productivity and it is one of the reasons which has impacted our ranking as a better place for doing business. The recent major strike which halted the wheel happened in February 2013 in which irrespective of their ideological affiliation irrespective of their ideological affiliation, all the trade unions participated against the anti-worker policies of the then UPA government. The country witnessed dramatic increase in strikes during 1966 to 1974 due to labour issues and this phenomenon continued in post liberalization era also. A data released by Labour Ministry exhibits the decrease in industrial disputes from 3,049 in 1979 to 391 in 2009 which further reduced to 138 in 2014 and 143 in 2015.
|Calendar year||No. of industrial disputes|
Source- Indian Labour Journal, Ministry of Labour and Employment
There are certain reservations on the recommendations of seventh pay commission also but these are expected to be resolved through dialogue. Though labour unions have their concerns but a comparative analysis shows that the Compound Annual Growth Rate (CAGR) of minimum wages is more at this time. Similarly percentage increase in minimum wage and ratio of minimum-maximum wage is also in line with the recommendations of the earlier pay commissions. This time government has announced to release the arrears in this financial year itself as contrary to sixth pay commission wherein first installment of arrears for the period beginning January 2006 were paid in September 2008.
Pay commission wise details of wage recommendation and growth
|Pay Commission||Year||Minimum Basic wages||Maximum wages||Increase %ge in minimum wages (without adjusting inflation)||CAGR for minimum wages
(without adjusting inflation)
|Ratio of minimum-maximum wages|
Seventh pay commission has recommended a fitment factor of 2.57 times (i.e. starting point would be what was prevailing on 1st January 2006) and also retained annual increment at 3%. Some of the salient features of the seventh pay commission recommendation are as below-
- New pay matrix system is recommended in place of existing pay-band & pay-grade system. Now the status of the employees will be determined by his level in the pay-matrix as compared to existing grade pay system.
- Gratuity ceiling enhanced from Rs. 10 lakhs to Rs. 25 lakhs.
- Commission has recommended performance related pay for all categories of employees. Commission has also made some recommendations in Modified Assured Career Progression (MCAP) for annual increments. If implemented, these measures will help to increase the efficiency & productivity of the employees.
- Interest free house building advance limit has been raised from Rs. 7.5 lakhs to Rs. 25 lakhs
- Cabinet didn’t accept the recommendation of the commission relating to increased deduction from employees salary towards group insurance scheme. As a result employees take home salary at the lower level will be higher by Rs. 1,470 (i.e. Rs. 1,500 proposed deduction less Rs. 30 current deduction).
- Fifth pay commission recommended a reduction of 30% in the headcount. No such recommendation has been made by this commission.
Four member team of seventh pay commission was headed by retired Supreme Court justice Shri Ashok Kumar Mathur and government has accepted almost all the recommendation of the commission except a few to make it more employee favourable (like higher deduction from salary towards group insurance scheme). Although the employee unions are asking for increasing the minimum salary from Rs. 18,000 to Rs. 26,000 and making it applicable to private sector also but they have decided not to go on strike for now as representative of the ministries are meeting with the union leaders and discussing their concerns. Members of the pay commission are independent from the government and they submit their report after objective assessment. After the cabinet approval Shri Mathur (Chairman, seventh pay commission) said that “at present it appears that the report as given by me seems to have been accepted in toto” which indicates that all the key recommendations of an independent body has been accepted by the government.
By: Shshank Saurav (Chartered Accountant and Anti-Money Laundering specialist)