Pay hike for Govt staff to boost consumer demand, underpin economic growth

India on Wednesday approved an increase of at least 14.29 percent in salaries and pensions for about 10 million government employees and pensioners, a move that is expected to boost consumer demand and underpin economic growth.

While the one-off hike is in line with the recommendations of a government-appointed panel, it is smaller than previous increases, including a nearly 40-percent rise in 2008.

The changes include lifting wages for the lowest paid to 18,000 rupees ($267) per month from 7,000 rupees.

After the cabinet meeting, Finance Minister Arun Jaitley said the revisions will take retroactive effect from Jan. 1, 2016 and would cost the exchequer nearly $17 billion in the fiscal year to end-March 2017.

"The inevitable consequence of this would be a pressure on the budget," he told reporters. "(But) I have already provided for it in this year's budget estimates. Therefore, the amount doesn't come to us as a surprise."

The decade by decade pay hikes, a populist wage policy that dates back to India's independence from British rule, is in addition to half-yearly and annual increments linked to prices.

Fitch's India Ratings & Research chief economist Devendra Pant estimates the cumulative impact will be 0.63 percent of GDP, a fillip for Asia's third-largest economy that is saddled with idle capacity.

"A rise in demand is likely to not only increase capacity utilisation but may also help revive the investment cycle earlier than expected," Pant said.

But for an economy primarily running on consumer spending, the hike is also potentially inflationary. The Reserve Bank of India has already flagged the risks that increases in wages and pensions pose for its 5 percent inflation target.

"It is a mixed bag," Jaitley said.