Administratively, Pay Commissions are seen as periodic exercises to ensure that the purchasing power of government employees is protected against inflation. While this understanding is not factually wrong, it is dangerously incomplete. The 8th Pay Commission is a fiscal time bomb that has started ticking for J&K.

Viewed through a macroeconomic lens, the impending 8th Pay Commission recommendations will be the single largest fiscal intervention in the Kashmir economy. The government runs an annual salary and pension bill of the Rs 40,000 crore which accounts for one third of the total expenditure and almost half of its total revenues. Implementing the 8th Pay Commission – expected to have a fitment in the range of 1.7 to 2.4 -- will potentially double the basic pay of J&K government and further worsen the already adverse J&K’s salary-to-budget ratio. 

Worse still, to fund the increased outgo, government will have no option but to borrow at market rates to fund a current expenditure item. This is arguably the worst possible fiscal policy combination. 

It doesn’t stop at that. The macroeconomic impact and implications on the economy of Kashmir extend far beyond the pay slips of four lakh government employees. The hike resets reservation wages across labour markets, crowds out private investment by increasing government’s borrowing, compresses capital expenditure at a time when job-creating infrastructure is most needed. Also, it generates non-tradeable inflation that functions as a hidden tax on every citizen outside the government payroll. 

An immediate one-time rollout with arrears is politically attractive but delivers an immediate blow to state finances. While for now, the 8th Commission will be seen as a gift horse not to be looked at in the mouth, it will deliver a mule kick as and when statehood is restored. J&K is thus caught between political fire and fiscal prudence, with no good exit.

In the pre-2019 world, J&K would have been under no legal obligation to follow central pay commission awards. As a........

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