The Narendra Modi government seems to have initiated a growth dampener called demonetisation after a trigger called pay panel proposals. The partial implementation of the 7th Central Pay Commission's (7th CPC) recommendations for Central government employees in June 2016, was followed by the demonetisation decision of November 8, 2016.
The twin but opposing effects of the two on the economy found a mention in the Monetary Policy Committee (MPC) meeting statement announced on Wednesday by the Reserve Bank of India (RBI) that revised the economic growth rate down for fiscal 2017.
"Incorporating the expected loss of growth momentum in Q3 and waning effects in Q4 alongside the boost to consumption demand from higher agricultural output and the implementation of the 7th CPC award, GVA growth for 2016-17 is revised down from 7.6 per cent to 7.1 per cent, with evenly balanced risks," the fifth bi-monthly Monetary Policy Statement, 2016-17 said on Wednesday.
It may be recalled that the government implementation of the hike for salary component as recommended by the 7th CPC, benefitting cover 47 lakh Central government employees and 53 lakh pensioners, of which 14 lakh employees and 18 lakh pensioners are from the defence forces.
The amount was significant.
"The combined outgo for the center on account of arrears for January to July and payments for August will total to Rs. 346 bn (Rs 34,600 crore)," India Ratings and Research Pvt Ltd. (Ind-Ra) said in a statement in August this year.
A decision on raising allowances is yet to be taken by the government and is reportedly being delayed because of its preoccupation with demonetisation-related challenges.
The CPC examined 196 allowances and gave its recommendations on abolishing or raising some of them while recommending others to be subsumed with other perks.
It had proposed 138.71 percent hike in HRA and 49.79 percent for other allowances, while submitting its voluminous report last November.
The additional amount on account of hike in HRA and other allowances is about Rs 29,300 crore (Rs 17,200 crore + Rs 12,100 crore) during the current fiscal, as estimated by the 7th CPC.
If the government decides to accept the 7th CPC's proposals on allowances, there is a risk of inflation going up, though its premature to judge the impact.
"The fuller effects of the house rent allowances under the 7th CPC award are yet to be assessed, pending implementation, and have not been reckoned in this baseline inflation path," the MPC statement of Wednesday said.
