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7th Pay Commission Pay and Allowances – 14th Finance Commission’s observations

14th Finance Commission’s observations on 7th Pay Commission Pay and Allowances of Central Government Employees and consequent revision of Salary of State Government Employees

Financal Commission recommends that Pay Commissions formed for reviewing Pay and Allowances should also review productivity of employees

The 14th Finance Commission was constituted in January 2013, and as per the its terms of reference it has to recommend to govt after making a study on distribution between the Union Govt and the States of the net proceeds of taxes, principles on grant-in-aid from Center to State, and augmentation of revenue States for the period 2015- 2020. Though, it may look like Finace Commission is meant for recommending share of revenue between Central and State, its recommendations gain significance in the areas of Pay and Allowances of both Central and State Government Employees as States require more funds to implement Pay and Allowances Structure at par with Central Government Employees. 14th Finance Commission has therefore recommended for consultations between the States and the Union on matters of determination of pay and allowances.

The Commission has also observed that the recommendations of Central Pay Commission is meant only for Central Government Employees and State Govt need not follow it. However, after 5th CPC almost all States have adopted central pay commission report with slight modifications.

The 14th FC is also concerned about raising salary bill for central government. Pay and allowances of Central Government Employees more than doubled between 2007-08 and 2011-12, from Rs.74, 647 crore to Rs.166, 792 crore due to the implementation of the Sixth Central Pay Commission recommendations( Including Defence Services)

The Commission has reported that 7th Pay Commission is likely to be submitted by August 2015 and The Government’s Finance memorandum projects that the implications of 7th Pay Commissions Pay and Allowances will be available from 2016-17 onwards.

Discussions of 14th Finance Commission with respect of Pay, Allowances, Pension, and Impact of 7th Pay Commission recommendations are reproduced below, for the purpose of detailed reading.


3.46 Pay and allowances of Union Government employees more than doubled between 2007-08 and 2011-12, from Rs.74, 647 crore to Rs.166, 792 crore due to the implementation of the Sixth Central Pay Commission recommendations( Including Defence Services). As a ratio of GDP, it jumped from a little over 0.9 per cent in 2007-08 to 1.2 per cent in 2008-09 and about 1.4 per cent in 2009-10 on account of both pay revision and payment of arrears. However, it moderated to a little over 1 per cent in 2012-13.
3.47 As in the case of salaries, expenditure of the Union Government on pensions, which had declined to less than 0.5 per cent of GDP in 2007-08, increased to about 0.9 per cent of GDP in 2009-10 due to the impact of revision in pensions. Subsequently, it came down to 0.7 per cent in 2010-11 and is estimated at 0.6 per cent in 2014-15 (BE).
3.48 Expenditure on salary, pensions and interest payments together accounted for 5.67 per cent of GDP in 2004-05 but declined marginally to 5.56 per cent of GDP in 2009-10, with the rise in expenditure on salaries and pensions being more than compensated by the decline in interest expenditure. These expenditures declined further to 4.9 per cent of GDP in 2012-13.

7.6 Some States have also pointed out the huge backlog in filling up sanctioned posts due to the fiscal restraint exercised in adhering to fiscal consolidation targets set in the state-level Fiscal Responsibility and Budget Management (FRBM) Acts. Maintaining that they need to undertake fresh recruitment in the future, they suggested that expenditure assessment should take into account the consequent increase in salary expenditure. Most of the States have urged that the implications of the Seventh Central Pay Commission’s recommendations on the fiscal position of States should be factored into the assessment of expenditure. Some States have also highlighted that in the past the salary projection norm of 35 per cent of the revenue expenditure (net of interest payment and pension) resulted in under-assessment of expenditure needs since, in reality, the share of salary expenditure was more than 60 per cent in many States. Some States have suggested accepting their salary expenditure projections based on inflation-linked releases of dearness allowance (DA), proposed new recruitments and anticipated pay revision rather than adopting any normative criteria.

17.23 Wages and salaries constitute a significant portion of the committed liabilities of both the Union and States. Periodic revisions based on the recommendations of the Pay Commissions of the Union, with States following suit, have contributed to rising revenue expenditure. For States in particular, the fiscal impact of a pay revision is severe, as the share of salary expenditure in their total revenue expenditure is substantially larger than in the case of the Union. Arrears in pay and bi-annual releases of Dearness Allowance compound the burden.
17.24 Technically, the recommendations of a Central Pay Commission are only for Central Government employees and States are not bound to follow suit. Indeed, up to the 1980s, States constituted their own Pay Commissions and prescribed their own pay scales, based upon their fiscal capacity. However, since the Fifth Central Pay Commission, salaries and allowances in States have tended to converge with those in the Union Government and since the Sixth Central Pay Commission, almost all States have adopted the Union pattern of pay scales, albeit with modifications.
17.25 An internal study by the Commission brought out the fact that the Union Government’s expenditure on pay and allowances  (including expenditure for the Union Territories) [2 Excluding productivity linked bonus/ad-hoc bonus, honorarium and encashment of earned leave, and travel allowances] more than doubled for the period 2007-08 to 2012-13, from Rs. 46,230 crore to Rs. 1,08,071 crore [If salary of defence services is included, the corresponding figures will be Rs. 73,073 crore and Rs. 1, 84,711 crore].
This increase can be largely attributed to the implementation of the Sixth Central Pay Commission recommendations, evident from the per employee annual salary (excluding defence salary) increasing from Rs. 1,45,722 to Rs. 3,25,820 over this period. Moreover, the share of expenditure on pay and allowances in revenue expenditure (net of interest payment, pensions and grants-inaid) increased from 11.8 per cent in 2007-08 to 13.1 per cent in 2012-13. The incidence of salary expenditure is much higher in the States than in the Union. In 2012-13, the share of expenditure on pays and allowances of all employees in the revenue expenditure (net of interest payments and pensions) among the States ranged from 28.9 per cent to 79.1 per cent. Per employee (for regular employees) salary in 2012-13 across States ranged between Rs. 2,12,854 and Rs. 5,49,345. Thus, the impact of revisions in pay scales on fiscal positions is uniformly significant, though it varies widely across States.


17.26 Given the variations across States and the lack of knowledge about the probable design and quantum of award of the Seventh Central Pay Commission, we believe that it is neither feasible, nor practicable, to arrive at any reasonable forecast of the impact of the pay revision on the Union Government or the States. Further, any attempt to fix a number in this regard, within the ambit of our recommendations, carries the unavoidable risk of raising undue expectations.

17.27 Our concern is the likely impact on overall budgetary resources, particularly of the States, once the recommendations of the Seventh Central Pay Commission are announced and adopted by the Union Government. All States have asked us to provide a cushion for the pay revision likely during our award period. The Union Government’s memorandum has built, in its forecast, the implications of a pay increase from 2016-17 onwards. The recommendations of the Seventh Central Pay Commission are likely to be made only by August 2015, and unlike the previous Finance Commissions, we would not have the benefit of having any material to base our assessments and projections and to specifically take the impact into account. We have, therefore, adopted the principle of overall sustainability based on past trends, which should realistically capture the overall fiscal needs of the States.

17.28 In our view, on matters that impact the finances of both the Union and States, policies ought to evolve through consultations between the States and the Union. This is especially relevant in the determination of pay and allowances, where a part of the government itself, in the form of the employees, is a stakeholder and influential in policy making. A national view, arrived at through this process, will open avenues for the Union and States to make collective efforts to raise the extra resources required by their commitment to a pay revision. More importantly, it would enable the Union and States to ensure that there is a viable and justifiable relationship between the demands on fiscal resources on account of salaries and contributions to output by employees commensurate with expenditure incurred. In this regard, we reiterate the views of the FC-XI for a consultative mechanism between the Union and States, through a forum such as the Inter-State Council, to evolve a national policy for salaries and emoluments.

17.29 Further,we would like to draw attention to the importance of increasing the productivity of government employees as a part of improving outputs, outcomes and overall quality of services relatable to public expenditures. The Seventh Central Pay Commission, has, inter alia, been tasked with making recommendations on this aspect. Earlier Pay Commissions had also made several recommendations to enhance productivity and improve public administration. Productivity per employee can be raised through the application of technology in public service delivery and in public assets created. Raising the skills of employees through training and capacity building also has a positive impact on productivity. The use of appropriate technology and associated skill development require incentives for employees to raise their individual productivities. A Pay Commission’s first task, therefore, would be to identify the right mix of technology and skills for different categories of employees. The next step would be to design suitable financial incentives linked to measurable performance. We recommend the linking of pay with productivity, with a simultaneous focus on technology, skills and incentives. Further, we recommend that Pay Commissions be designated as ‘Pay and Productivity Commissions’,with a clear mandate to recommend measures to improve ‘productivity of an employee’, in conjunction with pay revisions. We urge that, in future, additional remuneration be linked to increase in productivity.


6.34 Pensions are another committed liability which has been fully provided for in our assessment. The assessment of pensions is based on the growth rate of pension expenditure obtained from past data. The year-on-year growth of pension expenditure has shown volatility, with growth declining to a low of 0.42 per cent in 2002-03 and increasing to a high of 70.46 per cent in 2009-10. Given these fluctuations, it is not appropriate for us to take a long-run trend growth rate for this expenditure as a norm for assessment. It would be more appropriate to use the observed growth in the recent past. However, a potential fiscal liability may arise in the future with the introduction of the ‘one rank one pension scheme’ for Defence Services. The Budget 2014-15 has also made an additional allocation for this scheme, which is reflected in the increase in the growth of pension expenditure to10.67 per cent over the 2013-14 (revised estimates) growth of 6.62 per cent. While the Ministry of Finance projects an increase in pension payments by 8.7 per cent in 2015-16, a 30 per cent increase is expected in 2016-17 on account of the impact of the Seventh Pay Commission, followed by an annual growth rate of 8 per cent in subsequent years. Pension expenditures between 2011-12 and 2014-15 have grown on a year-on-year basis at the rate of 9.35 per cent per annum. We are of the view that annual revisions in the Dearness Allowance and annual accretions in the number of pensioners and the corresponding pension obligations can be covered by this growth in pension expenditure during our assessment period.

17.30 Pensions have been growing steadily, and the liability for pension payments is likely to cast a very heavy burden on budgets in the coming years. Some of the factors contributing to this growth are: (i) the rise in pensions recommended by successive Pay Commissions; (ii) removal of the distinction between people retiring at different points of time, so that all pensioners are treated alike in their pension rights; (iii) taking over the liability for pensions of retired employees of aided institutions and local bodies; and (iv) increasing longevity. The New Pension Scheme (NPS), a contribution-based scheme introduced by the Union Government in 2004 for all new recruits after the cut-off date, has now been adopted by all States, with the exception of West Bengal and Tripura. This scheme has the merit of transferring future liabilities to the New Pension Fund and factoring the current liability on a State’s contribution from its current revenues. We urge States which have not adopted the New Pension Scheme so far to immediately consider doing so for their new recruits in order to reduce their future burden.

Source: Finance Ministry