The announcement of a deferral is expected to be part of Finance Minister Arun Jaitley's Budget speech on February 29.

With a massive financial resource crunch estimated for 2016-17, the government is planning to defer the implementation of the 7th Pay Commission award.

Last week, the Union Cabinet approved the formation of an empowered committee of secretaries to work out ways for staggering the award through more than one financial year, instead of letting the Rs 1,02,100-crore bill from the implementation of the award come up at one go.

A top-ranked official said one of the options for the empowered committee was to defer the increase in allowances for central government employees, while letting the rise in pay for all scales to go through.

According to finance ministry figures, the ratio of allowances to pay for these 4.7 million employees is 1:1.4.

For instance, the Budget estimates in 2015-16 pegged the salary bill for all central government employees at Rs 60,731 crore (Rs 607.31 billion), whereas the tab for allowances is Rs 84,437.4 crore (Rs 844.37 billion).

The step would allow Finance Minister Arun Jaitley to keep the Budget numbers for this financial year and the next close to the targeted 3.9 per cent and 3.5 per cent of gross domestic product (GDP) that he has committed himself to.

For instance, even if the annual expenditure for 2016-17 were kept at about Rs 18 lakh crore (almost unchanged from Rs 17,77,477 crore in 2015-16), the Pay Commission recommendations would add another 5.5 per cent to it.

Given the sluggish pace of GDP growth and the almost negative deflator, the aggregate Budget numbers would otherwise be impossible to sustain on the back of the current trend in growth of tax receipts - just 50 per cent of the Budget estimates after the first eight months of the year, according to Controller General of Accounts data.

The assumptions being worked on in North Block are that these might not change dramatically in the next financial year, too.

The announcement of a deferral is expected to be part of Jaitley's Budget speech on February 29.

The formation of an empowered committee for the pay panel recommendations, again a first for the central government, is meant to bring all stakeholders on board in the exercise.

The official explained ministry-wise consultations with the department of expenditure in the finance ministry, in the run up to the Budget, were mostly over.

Those discussions had proceeded on the assumptions that the Pay Commission recommendations would be implemented.

It was now necessary to bring the secretaries of key departments on board about the need for a drastic cut-back on those estimates.

The status quo on allowances would also allow the government to ignore the demand made by various staff associations to raise the minimum level of salary for employees.

The Pay Commission has suggested that the minimum should be Rs 18,000 per month; the unions have demanded that it should be raised to a band of Rs 19,000 to Rs 21,000 a month.

Such a change would have created a ripple effect. About 70 per cent of the government employees are bunched in the non-executive ranks; the starting salary for them tops about Rs 42,000 a month, show calculations by the Commission.

Even a modest increase in pay for them would cascade the bill for the government by another Rs 50,000 crore (Rs 500 billion) annually. The award of the Commission is slated to take effect from January 1 this year.

A key element in the plan to defer some elements of the 7th Pay Commission recommendations will be the railway ministry.

Government managers reckon the powerful unions of the Indian Railways need to be brought on board for this plan to be successful.

The higher wage bill for the Suresh Prabhu-led ministry works out to Rs 28,450 crore a year (Rs 284.50 billion), only a shade less than the yearly loss it makes on its passenger services at present.

No formal communications have been sent out to the railway unions by the committee. "It will follow once the empowered committee has decided to take a call on which allowances to clip," said the official.

In a recent television interview, Minister of State for Finance Jayant Sinha had said the Pay Commission recommendations were the biggest headache for his ministry, struggling to keep the aggregate expenditure of the Union government under control.

Subhomoy Bhattacharjee in New Delhi

Source: Business Standard