7th pay commission payout: Domestic boost amid global volatility

Experts say that the government’s decision to implement the recommendations of 7th Pay Commission without any change has enthused the markets as it will provide a fillip to the economy by way of a rise in disposable income at the hands of individuals and a boost to overall consumption. It is also expected to benefit the consumption oriented sectors in a big way.

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“For the mid-income category, the basic expenses account for roughly 40 per cent of the salary and hence a rise in income will lead to an incremental discretionary spend. The biggest beneficiaries will be sectors such as housing, private transport, consumer durables and jewellery,” said Pankaj Pandey, head of research at ICICI Securities.

The sentiments are also on the rise as the rural demand may also witness a pick-up on account of a good monsoon expected this year and the factors together — the windfall for government employees and better crop in rural India — may prop up the economy.

The 7th CPC should also push the GDP growth. While government officials said that the dole out will have an impact of 0.7 per cent on the gross domestic product (GDP), a report prepared by Kotak Research pointed that while the consumption stimulus will be 30 basis point (100 basis point is 1 per cent), savings and tax revenue will have an impact of 17 and 9 basis points, respectively, on the GDP.

“The consumption stimulus is only 30 bps of GDP in FY17 from the Central government’s 7th CPC implementation after taking into consideration pensioners’ behaviour, tax incidence and saving propensity. This will be positive for urban consumption and will push up demand for consumer durables. Additionally, with a normal to above normal monsoon and a consequent higher crop output, India could also see rural consumption getting some boost. This will likely be the second consumption driver for the economy over FY17-18E,” said the Kotak Research report.

Apart from urban consumption, rural consumption is also expected to pick up going ahead on a number of factors. “A good monsoon alongside the recent increase in MSP (minimum support price) is likely to revive rural demand, which had collapsed over the past couple of years. The implementation of the Pay Commission’s recommendations will aid this positive sentiment,” a market analyst said.

Pandey added that, “Consumer durable and FMCG companies are expected to report better numbers in this quarter and the next quarter.”

The consumption of automobiles, consumer durables, construction material and houses is set to rise as the entry level pay of Central government employees will go up to Rs 18,000 per month from Rs 7,000 while the maximum pay, drawn by a Cabinet Secretary, will jump to Rs 2.5 lakh per month from Rs 90,000 at present. Even the housing loan allowance for government employees will move up from Rs 7.5 lakh to Rs 25 lakh. The Pay panel’s recommendations will benefit over 47 lakh Central government employees and 53 lakh pensioners, of which 14 lakh employees and 18 lakh pensioners are from the defence forces.

According to the State Bank of India, the 7th pay panel’s award will not only boost consumption but also household savings, which is a plus for the macro-economy. “The recommendations are positive for the economy as they will boost consumption as well as savings through a concomitant increase in bank deposits, pension and provident funds. This is welcome in a year when bank deposits have touched a 53-year low,” the State Bank of India said in its report analysing impact of government salary hikes. SBI says savings rise more than consumption after increase in salaries.

“No doubt consumption increases with increase in income, nonetheless our study indicates that higher income on account of Pay Commission translates more into higher household savings than consumption. Taking a look at the household savings and private final consumption expenditure, growth rate of household savings rate sees an increase in the year immediately after the submission of the report from the preceding year. However, there is no clear pattern in the consumption rate,” the State Bank of India said.

Both these factors of higher consumption and increase in savings bode well for the financial markets, as additional spending will lift corporate profits while extra savings will boost bank deposits and available pool of resources for lending for productive purposes.

Inflation remains a concern

The implementation of the 7th Central Pay Commission awards can, however, be inflationary and may limit the Reserve Bank of India’s ability to cut interest rates.

The Reserve Bank of India has projected a direct impact of the latest Pay Commission recommendations on headline inflation to be around 150 basis points, while the indirect effects are estimated to be around 40 basis points. When asked on the likely impact of salary hikes on inflation, finance minister Arun Jaitley on Wednesday said some impact on inflation will be natural as more resources are being made available in the hands of the government employees. Kotak Research said that if the government accepts pay panel’s recommendations on allowances, then inflation may inch up by 15 basis points.

State Bank of India feels the impact on inflation will only be temporary. “We believe impact on inflation could be temporary. Past data suggests that inflation tends to rise following Pay Commission recommendations and then declines. However, given the significant underutilisation of capacity, we believe the impact on inflation may not be that significant,” SBI said in its report.

The implementation by the Central government would also force the states to hike salaries of their employees. States typically follow the Centre in raising employees’ salaries. This could further add inflationary pressures. Salary hikes are due in states including Uttar Pradesh, Punjab and West Bengal, among others.