In a bonanza for over 1 crore Central government employees, the Union Cabinet on Wednesday approved a 14.29 per cent hike in their salaries and pensions effective January 1, 2016, accepting most of the recommendations of the Seventh Pay Commission.

Finance Minister Arun Jaitley said he hoped the payout, which will cost the exchequer ₹1,02,100 crore this fiscal and ₹72,800 crore annually, will drive higher consumption, savings, tax revenues, and economic growth.

But he also cautioned that increased money supply would lead to inflationary pressures.

The report was submitted in November 2015 and has been implemented in seven months, the shortest time-frame. The Sixth Pay Commission report took 32 months to implement.

The Centre, however, decided to defer the decision on implementing the recommendations on allowances, and instead set up a review panel under Finance Secretary Ashok Lavasa.

“The committee has a time-frame of four months to decide on these,” Lavasa said. The decision will save the government about ₹17,167 crore in revised allowances. The average hike in salaries and pensions is estimated at 14.29 per cent, based on a fitment factor of 2.57. The Commission had recommended an overall increase of 23.55 per cent in salaries, allowances and pension.

But in line with the Commission’s report, under the new salary structure effective August, the minimum monthly pay has been raised from ₹7,000 to ₹18,000, while the maximum pay will be ₹2.25 lakh and ₹2.5 lakh for the Cabinet Secretary.

The rate of increment has been retained at 3 per cent;there will be two dates of increments – January 1 and July 1– with employees being eligible for either.

Arrears to be paid out In a break from the past, the Centre has also decided to pay out all the arrears, estimated at ₹12,000 crore, in the current fiscal.

The decision will impact 47 lakh Central government employees and 53 lakh pensioners.

Fiscal discipline Jaitley said he was confident that the fiscal deficit target of 3.5 per cent of GDP for 2016-17 would be met as the Union Budget has provided for the Pay Commission payout. “Salaries have to come to a respectable level so that the government is able to attract the best talent,” he said.

On allowances A decision on the date for implementing the revised allowances will also be taken by the Lavasa committee, though the pay and pension hike will be effective from January 1, 2016. But the government has decided to abolish most interest-bearing advances and interest-free advances.

Multiplier effect Consumer durable firms and real estate companies believe that higher disposable incomes will boost demand for discretionary and aspirational products.

The Congress supported the payout decision, but said it will wait for the fine print.

“Let’s wait for the full report to know the exact position on its implementation,” a party spokesperson said. However, the National Joint Action Committee (NJAC), comprising 32 lakh railway, defence, Central government and postal employees, said it would prepare in “full swing” for an indefinite strike from July 11 as the government had rejected its suggestions on a minimum wage and the National Pension System.

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