Fears for India’s finances as government employees demand more pay

The pay hikes approved by prime minister Narendra Modi’s government last week will already cost the exchequer an additional 1 trillion rupees (Dh55 billion) a year.

Finance minister Arun Jaitley discusses the recommendations of India’s 7th Pay Commission in New Delhi on June 29, 2016. EPA

NEW DELHI // More than three million Indian federal government employees are threatening to strike next week for bigger salary increases, but analysts say their new pay levels already place an unsustainable burden on the country’s finances.

The pay hikes approved by prime minister Narendra Modi’s government last week will cost the exchequer an additional 1 trillion rupees (Dh55 billion) a year, according to official calculations.

“They definitely don’t have this kind of money lying around,” said John Raja of How India Lives, a New Delhi-based firm that analyses public data.

“This is like an inter-generational transfer of money. You’ll be borrowing for salaries and pensions today, and you’ll let the next generation take care of paying back those loans.”

India at present runs a revenue deficit – the amount by which expenditure exceeds income – of 2 per cent of gross domestic product. Adding a trillion-rupee bill to this equation inflates the deficit and leaves much less to spend on other programmes, Mr Raja said.

The salary increases were recommended by the federal pay commission, a body set up roughly every 10 years to examine costs of living in relation to salaries. The last federal pay hike was in 2008.

State governments set up their own pay commissions, although some tether their salary structures to those of the federal government.

The federal government has 4.7 million employees and pays pensions to another 5.2 million retirees. These numbers include 1.4 million serving members and 1.8 million pensioners of the Indian defence forces.

Employees earning a total minimum wage of 7,000 rupees a month will see this rise to 18,000 rupees. Salaries at higher ranks are pegged to this basic pay. At the rank of cabinet secretary, employees will receive 250,000 rupees per month, up from 90,000 rupees.

Although salaries at these two levels have more than doubled, the average increase is 23.5 per cent according to government figures.

Even so, unions who together represent 3.3m government employees say the pay commission underestimated the costs of living.

“The price considered of essential commodities … is not right,” said C Srikumar of the All India Defence Employees Federation. “They have taken the price of dal [lentils] at 97 rupees [per kilogram]. Where do you get dal for 97 rupees?”

The unions have already met finance minister Arun Jaitley and other cabinet members to present their demands. If accepted, the minimum-wage employees – all 4.1 million of them – will be paid 26,000 rupees a month, rather than 18,000.

Although a strain on finances, the salary hikes could provide economic benefits. “Extra money in the hands of a large number of salaried, earning people will lead to higher consumption and demand-driven economic growth,” the Associated Chambers of Commerce and Industry of India said last week.

Higher pay could also discourage corruption and make government departments more competitive with the private sector in attracting top talent.

But the exact effects are usually difficult to track, Mr Raja said.

“For example, we’ve had previous pay commissions in the past, but has corruption come down because of that? It hasn’t.”

And the many government departments that are understaffed might now be even less willing to hire because of the higher salaries they will have to pay, he said. Also, the salary hikes are not being tied to the kind of work done, Mr Raja argued. “It isn’t as if, now, a super-specialist doctor in a government hospital is getting paid what he deserves.”

Government employee unions meet on Wednesday to review their plans to strike next week.