Economy
7th Pay Commission: Consumption boost, higher fiscal deficit and inflationary pressures
While pay hikes will boost consumer discretionary demand, do not forget the extremely adverse financial impact of implementing these recommendations
 
The 7th Pay Commission has recommended a 16% hike in salary for central government servants. This will benefit an estimated 47 lakh serving central government employees and 52 lakh pensioners. While this will boost consumer discretionary demand, it will increase government's fiscal burden and also raise inflation, feel brokerages and ratings agencies.
 
"Since the pay hikes are a boost to government employees’ disposable income, they have historically boosted consumer discretionary demand. A category wise breakdown of consumption shows discretionary spending on automobiles, clothing and footwear and expenditure on education have historically risen in the years following
previous pay commissions," says Nomura in a research note.
 
The brokerages and ratings agencies also agree that the recommendations of the 7th Pay Commission, if accepted, would increase fiscal burden of the government and also raise economy's inflation profile. 
 
"If (the recommendations of 7th Pay Commission are) adopted, bulk of the impact will be absorbed by the FY2016-2017 Budget and are scheduled to be implemented from January 2016 onwards. Historically, Pay Commission’s rollouts have been positive for consumption trends but negative for fiscal balances. The Panel estimates the financial impact of implementing these recommendations at Rs1.02 lakh crore, of which 72% will be borne by the central government’s Budget and rest by the Railway Budget. In absolute terms, the additional expenditure is expected to be in the tune of 0.65%-0.7% of GDP, slightly less than 0.77% arising from the 6th Pay Commission," says DBS Bank Ltd in a research note.
 
A pay commission is constituted every decade to revise the pay scale of government employees. Although government employee salaries are adjusted for inflation every year (dearness allowance), the pay and pension component is revised only once every 10 years based on the recommendations of the pay commission. Since Independence, there have been six pay commissions. In the past, the fiscal stimulus resulting from the one-time salary revisions has led to a consumption boost, overshooting of the fiscal deficit target and inflationary pressures.
 
According to Nomura, this time, the tasks of the 7th Pay Commission was much tougher for two reasons. "One, the government’s fiscal consolidation targets are quite aggressive for the next two years from 3.9% of GDP in FY16 to 3.5% in FY17 and 3% in FY18, leaving little scope for sharp increases in its wage and pension bill, and second, a fiscal stimulus not linked with commensurate productivity increases could spur inflation, countering the Reserve Bank of India (RBI)’s medium term target of lowering CPI inflation to 4% by March 2018," it said.
 
The suggested wage increase by the 7th Pay Commission would come into effect at the beginning of the 2016 calendar year. The recommended increase is less than the 40% that was implemented after the last Commission in 2008. On its own, the pay rises would increase the central government's wage bill by around 0.5% of GDP. It is important to note though that this would also likely affect state government finances as they would be inclined to follow suit.
 
Terming the recommendations of 7th Pay Commission as a challenge to India's fiscal consolidation plans, Fitch Ratings says, "A recommended 23.55% increase in remuneration for India's central government employees, if fully implemented, would have a significant impact on the government's wage bill, and add to challenges the government faces in achieving fiscal consolidation targets."
 
"The central government has earlier indicated a target fiscal consolidation of 0.4% of GDP for a deficit of 3.5% in the fiscal year ending 31 March 2017 (FY17), down from 3.9% in FY16. As such, the planned wage increase is sufficient to add substantive challenges to achieving the planned medium-term consolidation targets. The government could seek to cut expenditures in other areas. There may be some room to rein in the subsidy bill, for example. But the government may find cuts in capital expenditures undesirable, especially as investments are planned to play a key role in its efforts to stimulate the economy," the ratings agency added.  
 
Echoing similar views, DBS Bank said, the likely options for next year’s fiscal math point are to restrain spending elsewhere, source additional tax revenues or renege on the fiscal deficit targets. It said, "If the targets are adhered to, allotments towards capital expenditure are likely to fall. This means that a budgeted 25% jump in capital expenditure in FY2015-16 might follow with a less 10% increase next year, while revenue spending rebounds from the small 3% rise this year. Combining these headwinds, there is a risk that next year’s fiscal target is raised modestly, limiting the room for additional monetary stimulus."
 
 
Nomura also sees the 7th Pay Commission as helping boost demand for four wheelers across India. "In our view, a 15-20% pay hike for central government employees is likely to benefit four-wheeler demand by a FY17-18F CAGR of about 5-7%. We believe that the penetration of two-wheelers is already high with government employees, and thus the benefits may be more limited to a FY17-18F CAGR of around 1.5%-2.5%. Over a two-year period, car sales could benefit by 14% as the state and central government pay hikes come through," it added.
 
The last few pay commissions suggest some important implications for the economy. First, the previous three pay commissions (fourth, fifth and sixth) hurt India’s fiscal position. The Fifth Pay Commission implemented in FY98, resulted in a rise in the central government’s wage and pension bill from 2.6% of GDP in FY97 to 3.2% in FY98/FY99.

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Widespread leakages in Maharashtra government’s mediclaim scheme
Nearly half of the people who have benefitted from the Rajiv Gandhi Jeevandayee Arogya Yojana are not eligible. Government hospitals are looting the poor by asking them. Private hospitals are charging for services that are already covered under the Scheme. Questions are also being raised about inefficiencies of insurer or TPAs. All this at taxpayers’ cost!
 
The Maharashtra government’s Rajiv Gandhi Jeevandayee Arogya Yojana (RGJAY), launched in July 2012, provide health insurance cover up to Rs1.5 lakh for families earning less than Rs1 lakh per year. The Scheme is meant for people below poverty line (BPL) families (yellow cardholders) and above poverty line (APL) (orange cardholders). A study conducted by the Tata Institute of Social Science (TISS) points to an unusually high level of leakages in the system. If so, how is the system still afloat?
 
The loss created from different stakeholders like false beneficiaries, hospitals, insurers, third party administrators (TPAs) is funded by the taxpayers. This shows how another ambitious project for the poor does not actually help the poor. The study clearly indicates that poorer the beneficiaries, greater the level of difficulty for availing benefits. Here are the main conclusions from the study along with Moneylife comments in italics – 
 
  1. Arogyamitra should be at the hospital to help the beneficiaries about the amount approved, inclusions they are entitled to and protocols regarding registering complaints. Arogyamitra seem to be an imaginary character missing in action. Will RGJAY visit hospitals to locate this friendly guy?
  2. The analysis revealed that almost half of the RGJAY beneficiaries are actually from the non-eligible category with family income higher than Rs1 lakh per annum. A massive fraud from consumers? Rich consumers will always find ways to loot the government scheme. What is the exact way by which those having income over rupees one lakh (and hence non-eligible category) were able to make RGJAY pay in such a high number of cases (nearly half)?
  3. Out-of-pocket (OOP) expenses seem to be more than just OOPs moment for the RGJAY. Hospitals made beneficiaries pay for services like diagnostic tests, medications, and consumables, even when it was covered under the Scheme. A notable finding was that the mean OOP spending in private hospitals was more than twice that compared with public hospitals. Seems to be in-line with the expectation that private hospitals are better qualified at looting the consumers.
  4. Reasons for private hospital OOPs - The most predominant reasons cited for paying for services in private hospitals were “procedure was not covered under RGJAY,” (30%) followed by “lack of knowledge” (18%). The other reasons were paying for food, “noncooperation from hospital staff,” and “lack of time to complete the necessary paperwork.” So, the nice staff at private hospitals may suddenly seem non-cooperative once you ask for benefits under RGJAY scheme.
  5. Reasons for public hospital OOPs - Those who cited “lack of information” as the reason for paying for services in public hospitals was the highest (33%), followed by “unavailability of time to complete all the necessary paperwork” to avail of the services (19%). So, for staff of public hospitals not having information or time to complete the paperwork seems to be the plausible reasons and this is not something out of the world.
  6. Unable to reach the poor – Difficulty in reaching the poor is also as expected. According to the data provided by the Food and Civil Supplies Department, of the total eligible families in Mumbai, 99.22% are orange ration cardholders (annual income between Rs15,000 and Rs1 lakh), 0.28% (annual income less than Rs15,000) are yellow ration card holders. Such a wide gap? Yellow ration cardholders in Mumbai should buckle up to avail of RGJAY services.
  7. Insurers and TPAs are minting? For the year 2014-2015, according to the RGJAYS, premium was paid for 21.9 million households. In other words, 85% of the population is currently covered by the scheme. While insurers earned good premium and TPAs a slice of it, there are reports of issues with them. Why would there be no leakages with this stakeholder?
 
When Dr Raju Jotkar, assistant director, Rajiv Gandhi Jeevandayee Arogya Yojana, was asked “How much is the incentive given to TPA for keeping the claims ratio down?” he said “No precise idea, but I hear that bonus is given to TPAs which is also substantial.”
 
 
The study found that about a third of the beneficiaries experienced financial catastrophe, if indirect expenditure is taken into consideration. This also implies that for the poor, ill health has further deepened the existing poverty. There is the need for awareness campaigns targeting the eligible households to be carried out. This is to be done not just by media but by including local non-governmental organisations (NGOs) and self-help groups to make people aware of the scheme’s features and benefits.
 
It also says that given the fact that precious financial resources are spent for implementing RGJAY, it would be desirable that policy makers take note of the above evidence and do a critical analysis to fully understand the implications of this new financing intervention.
 
Moneylife has asked a few questions to the authors of the eye-opening report and also to RGJAY officials. If and when, we get responses with additional information, we will write an additional article.
 
 
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COMMENTS

Shirish Sadanand Shanbhag

1 year ago

In Mumbai, all types of treatments in BMC Hospitals like KEM, Nair, Sion, Rajavadi, etc. or Maharashtra Govt. Hospitals like JJ, Cama, GT, etc. are available free of charge to all, even before Rajiv Gandhi Arogya Scheme was launched by the Govt.

Fall in public, private investment major concern: Rajan
Reserve Bank of India Governor Raghuram Rajan on Friday said he was concerned that the fall in public and private investment in India would affect the country's economic growth. 
 
"On the growth front, the central concern is with investments. Private investment has fallen back a bit and so has public investment," Rajan said at an event here.
 
However, despite the slowdown in growth and investments, strong foreign direct investment and some traction in infrastructure development could encourage private investments, he added.
 
Prime Minister Narendra Modi said in Britain last week that the world's confidence in India is rising is proved by the fact that foreign direct investment into India has increased by 40 percent.
 
The RBI recently lowered its growth forecast for the country's current fiscal to 7.4 percent, from the 7.6 percent it had projected earlier.
 
In September, the central bank cut the repo rate, at which it lends to commercial banks, by 50 basis points to 6.75 percent.
 
Disclaimer:  Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

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