More than 10m current and former Indian civil servants have been awarded a 23 per cent rise in salaries, allowances and pensions — a windfall aimed at boosting private consumption that will add to pressure on New Delhi’s finances.
The move, which will cost about $15bn a year, or 0.7 per cent of gross domestic product, was proposed in November by an independent pay commission constituted once a decade to review civil servants’ pay and recommend increases.
On Wednesday the government of Narendra Modi, prime minister, approved the hefty pay rise for India’s 4.8m central government employees, and its 5.4m retired civil servants, with the rise taking retrospective effect from January.
Economists say the wage rise will bolster private consumption, helping to propel India’s continuing economic expansion, but will make it tougher for New Delhi to achieve its goal of reducing its fiscal deficit. Mr Modi’s government had already accounted for about 75 per cent of the total cost in its budget, unveiled in February.
Rajeev Malik, senior economist at CLSA, the brokerage, said: “For growth, it’s positive simply because it’s a mini consumption boost. Finally people have money in their pocket, and a good number of them will spend it on conspicuous consumption.”
However, he added: “But purely from a fiscal management point of view, having this kind of shock every 10 years isn’t helpful.”
Analysts said it could also inadvertently stoke inflation, noting how it accelerated sharply after government wages were raised by nearly 40 per cent in 2008.
India’s economy grew 7.9 per cent in the first quarter of 2016, confirming its position as the world’s most dynamic large economy. But growth has relied mainly on private consumption, while investment remains sluggish.
The consumption boost will extend well beyond those who received a pay rise on Wednesday. India’s 29 states will over the next two years follow the government’s lead by raising the pay of their employees, although their strained finances may not permit them to match the magnitude of New Delhi’s largesse.
“Car sales and consumer durables have been doing fairly well and this would help keep that story alive,” said Pranjul Bhandari, chief India economist for global bank HSBC.
“In the past, purists have looked down on consumption-led growth as it can become inflationary very quickly. But at this point in India, we don’t really have an option. It’s going to be a while before private investment starts picking up,” she said.
Shares of consumer goods companies rose sharply on the Bombay Stock Exchange after the pay rise was approved.
Many analysts expressed dismay that Mr Modi’s government had approved a mass pay rise for all central government employees without any consideration of civil servants’ actual performance.
At the bottom end of the civil service pay scale, Indian government employees such as drivers, clerks and peons who carry out office errands — who far outnumber the professional staff — are already paid up to three times more than their private sector counterparts.
But top bureaucrats are still paid far less than they could earn in private sector jobs, which makes it difficult for the government to recruit talent to run the administration.
“The problem with this whole thing is you have way too many clerks, drivers and peons who get too much money,” said Sunil Jain, managing editor of India’s Financial Express newspaper. “But if you want to hire a top-class secretary [a high-level bureaucrat] you can’t pay that guy what he needs to be paid to lure him from the private sector.”