Indian Economy & Issues Relating to Planning Mobilization - 7<sup>th</sup> pay commission - Hit’s & Misses (Download PDF)


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The Cabinet approved recommendations of the Seventh Pay Commission on pay and pensions in a decision that will boost consumption by putting extra disposable income in the hands of the central government’s 4.7 million employees and 5.3 million pensioners


Cabinet clears 23.55 per cent increase in overall emoluments for employees

  • The hike — at around 14 per cent — is the lowest in 70 years
  • Estimated to put an additional burden of Rs. 1.02 lakh crore on the exchequer annually or nearly 0.7 per cent of GDP

Is this trend welcome

  • Yes, Itwould limit the inflationary effect of the pay revisions— The 6th Pay Commission had suggested a hike of 20 per cent which was doubled by the time it was applied and eventually amounted to about 54 per cent.
  • It was immediately followed by a period of higher expenditure and higher inflation

Other recommendations:

Graph shows the recommendations

Graph Shows the Recommendations

Recommendations for planning, mobilization of resources, development, growth, and employment

Minimum Pay:

  • It based on the Aykroyd formula, the minimum pay in government is recommended to be set at Rs. 18, 000 per month.
  • The Commission recommends eliminating 52 allowances; another 36 allowances incorporated in existing allowances or in newly proposed allowances

One Rank One Pension:

  • Proposed for civilian government employees on line of OROP for armed forces
  • To exit the armed forces at any point in time between 7 to 10 years of service allowed by short service commissioned officers.
  • Ceiling of gratuity better from Rs. 10 lakh to Rs. 20 lakh; ceiling on gratuity to be raised by 25 percent whenever DA rises by 50 percent
  • Military Service Pay (MSP) is a advantage for the many aspects of military service, will be permissible to the defence forces personnel only.

New Pay Structure:

  • The present system of pay bands and grade pay has been dispensed with and a new pay matrix has been designed with a view to bring in greater transparency.
  • Grade Pay has been included in the pay matrix. The status of the employee, hitherto determined by grade pay, will now be determined by the level in the pay matrix.

Lead to More money in the hands of people

  • Lead to more money in the hands of the consumers— huge consumption increase to the economy (around Rs. 45, 000 crore or 0.3 per cent of GDP)
  • It will also increase in the growth rate of household savings— welcome in a year when bank deposits have touched a 53-year low and the impending FCNR (B) redemptions could also lead to outflows from banks in September (an increase of around Rs. 30, 000 crore or 0.2 per cent of GDP)
  • Growth in—
  • Positive impact on stock markets
  • Consumption growth: urban demand will spur after implementation and this will increase demand for discretionary products (consumer products)


  • Relatively minor effect on the overall inflation
  • Retail inflation & global oil prices— may start inching up
  • Demand rising is likely to not only increase capacity utilization but may also help recover the investment cycle earlier than expected. Demand push inflation could definitely occur when there is too much money chasing not much supply because factories are not producing more. But the over-capacity because of lack of demand and the capacity utilization being around 70 per cent provide a major cushioning effect.
  • Consumer price inflation may inch up due to higher prices of services, but impact on wholesale price index is likely to be muted due to the counter balance provided by the deflation in commodity prices and the availability of excess capacity in several manufacturing sectors. (new consumer price index being different than its predecessors)

Fiscal Deficit

  • It impact on the fiscal deficit for the current financial year— the hike in emoluments will be effective from January 2016 and all debts will be paid out in the current year itself.
  • There will be an increase in tax revenue from more income tax collection (due to higher salaries) and excise duty collections – or GST– from increased consumption
  • To meet the fiscal deficit targets: Compromise on the capital expenditure. Which is important to promote growth.

- Published/Last Modified on: August 31, 2017


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