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The Cabinet gave its approval to an increase of at least 14.29 per cent in salaries and pensions for about 10 million government employees and pensioners.
The changes include lifting wages for the lowest paid to 18,000 rupees ($267) per month from 7,000 rupees.
The hike is smaller than previous increases. India spent a net 221 billion rupees when it last raised salaries following the 2008 recommendation for a raise of as much as 40 per cent.
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 federal budget accounted for only part of this amount, leading to concern the government may miss its deficit target in case of a full rollout this year. Jaitley downplayed these fears.
“The inevitable consequence of this would be a pressure on the budget. I have already provided for it in this year’s budget estimates. Therefore, the amount doesn’t come to us as a surprise.” he said.
The move also risks spurring inflation, the Central Bank of India warned earlier.
The Finance Minister called it a “mixed bag”.
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.