Govt. raise of DA by 6 % — only a short term gain

The Modi government’s offer of a 6 per cent rise in DA does indeed matter, but only in the short term.

Written by Subhomoy Bhattacharjee | New Delhi | Updated: October 7, 2016 5:05 pm
modi The Modi government’s offer of a 6 per cent rise in DA does indeed matter, but only in the short term. (Source: PTI)

Does the rise in the salary of central government employees matter? As it turns out, the Modi government’s offer of a 6 per cent rise in DA, does indeed matter but only in the short term.

It matters because despite all that was said by ministers, industrialists and bankers at the Prime Minister’s residence on Tuesday, an investment turnaround is at least two years away.

Meanwhile, a consumption boost of approximately Rs 15,000 crore from the cabinet decision on Wednesday, will at least clear the supermarket shelves. Services sell some more packages and also draw in some temporary employment. This is good news.

It is better than the outlook for the investment story. Throughout this year, state-run ONGC has got massive response globally whenever it has put out tenders for hiring rigs. While the response is great for the company, it is one more example that the investment story in India for the last five years is concentrated only in the commodities sector.

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If you exclude companies that have little room for capital expenditure, like those in e-commerce or in banking which do not spend much in capital, there is some scary data coming up.

Among the top 500 asset heavy companies in India, less than a hundred have added any capital in the past few years. Of those which did most are in the commodity space.

READ: Dearness Allowance hiked by 6 per cent for central govt employees

As the global head winds for the commodity sector mounts, that investment stream too has dried up. Prime Minister Narendra Modi is discovering that there are not too many other sectors where investment has happened or is likely to happen big, in the near future.

“During the capital expenditure (capex) cycle upturn from FY06 to FY12, the major chunk of it was attributable to commodity sector. Given the global uncertainty with respect to commodity prices other than relevant state-owned ones in each of those sectors, private corporations are unlikely to go for heavy duty capex”, says Deep Mukherjee, senior director–corporate ratings, India Ratings.

Data shows there is little indication that heavy duty investment is happening elsewhere. A Crisil report notes, “in the metals space – particularly steel and aluminium – India has created surplus capacities in the last few years and is turning into a net exporter from being a net importer. In addition, sectors such as refining & marketing and petrochemicals are also being affected due to the global decline in commodity prices”.

So even if the State Bank of India chief Arundhati Bhattacharya were to take risks and offer soft loans there will not be major takers among the non-commodity sectors. They have little room to invest since the room to sell is limited. There are few markets outside and the market within India is not expanding. Government employees will not buy steel or coal from their larger purse.

Private sector capital expenditure which had exceeded public sector investment in 2010-11 to reach Rs 2,90,000 crore has consistently slipped thereafter. The Crisil Research note estimates it will be Rs 40,000 crore lower in this financial year, a 14 per cent dip. And remember the numbers have already been firmed up for next year.

So though the government wants companies to take a risk and plough ahead, the earliest they are looking at is 2017-18. And this includes the Railways.

The few with additional investment plans in the pipeline are the state-run companies. So this year ONGC will spend about 20 per cent more than it did last year, NTPC though flat will spend about the same as ONGC while Coal India will add 15 per cent more and Sail about 10 per cent.

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  1. M
    mohan
    Sep 9, 2015 at 3:57 pm
    The government decision to increase Da for government wmployees is welcome...but no consideration has beeen given the high cost has affected other non government employees or retired persons whose ry remains same without any increase.The government should take urgent action to attack price escalation.
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