Sixth Pay Commission arrears in instalments.

Prime Minister's Economic Advisory Council wants the government to pay its employees in phased manner and deposit part of the estimated arrear of 18,000 crore in their Provident Fund while implementing the Sixth Pay panel report to minimise its impact on inflation.

"Since the payment of arrears in cash could result in marginal rise in inflation rate due to spurt in demand for various products, EAC has said that government should consider depositing part of the arrears due to employees in provident fund and pay the remaining amount in a phased manner," official sources said.

The council headed by noted economist and former Reserve Bank Governor C Rangarajan, is of the opinion that the payment of arrears in one go could result in further rise in prices, especially of manufactured goods and consumer products.

"The government had paid the arrears in a phased manner while implementing the report of previous Pay Commissions, so it can consider it again," Rangarajan had earlier said.

The council, which advises Prime Minister Manmohan Singh on important economic matters, had earlier said the inflation rate could come down to 5 to 5.5 per cent after about four months following good monsoon and measures taken by the government.

Inflation, however, has already crossed 8 per cent mark, and the analysts fear that it could soon touch 10 per cent mark if the hike in international crude oil prices is partly passed on to the consumers.

The Sixth Pay Commission headed by Justice B N Srikrishna, which submitted its report in March, has recommended an average 28 per cent hike in salaries of about 40 lakh central government employees with effect from January 1, 2006.

It estimated that hike in salaries would cost about Rs 12,000 crore annually, while the payment of arrears would put an additional one time burden of Rs 18,060 crore to the exchequer.

The Union Cabinet, which considered the pay panel report last month, forwarded it to a committee of Secretaries headed by Cabinet Secretary K M Chandershekhar, following protest by sections of government employees who are not happy with the recommendations.