Will higher salaries prompt people to spend more on cars and houses, triggering a cycle of spending and investment? Investors, traders and economists are all looking forward to the implementation of the Seventh Pay Commission award, which can lift demand across segments of the economy.
The much-awaited Seventh Pay Commission report recommending higher salaries for nearly 48 lakh central government employees and 55 lakh pensioners will likely to submit its report on Thursday (19 November).
The Seventh Pay Commission is likely to recommend a net increase of 22 per cent over the current pay package of Central government employees with a 15 per cent raise in basic pay and up to 25 per cent jump in allowances, according to a report in
The Indian Express.
Analysts are, however, acutely watching the fiscal and expansionary impact of the Seventh Pay Commission's payouts.
Economists say even a 15 per cent increase in salary bill represents $25 billion of additional disposable income. In addition, there is a likelihood of increase in loan eligibility for housing and vehicles. All this can provide a significant upside to consumer discretionary spend.
According to Bank of America Merrill Lynch a 15 per cent salary increase would push up the central government's salary bill by Rs 25,000 crore, which is 0.2 per cent of India's gross domestic product.
The recommendations of the commission have to be implemented with effect from 1 January 2016 and are likely to further burden the government exchequer and put pressure on inflation.
"I think we are in a very good shape as far as fiscal management is concerned. That was appreciated by all economists," minister of state for finance Jayant Sinha had said while interacting with reporters after a meeting of economists which was chaired by finance minister Arun Jaitley at the NITI Aayog.
Sajjid Chinoy, India economist of JP Morgan, termed the potential 15 per cent salary hike as "conservative" and said that it will be "well received" by markets as it would put less pressure on the government's finances. "Remember the fiscal deficit this year is well on course to touch 3.9 per cent, that 3.9 has to go 3.5 and 3.5 has to go 3. So we are looking at nearly a 1 per cent of GDP fiscal consolidation over the next two years," Chinoy told
NDTV.
According to several reports salary hikes are likely to be much more moderate compared to the sixth pay commission recommendations, which saw average salaries increasing by 30-40 per cent.
They resulted in an additional annual outgo of nearly Rs 18,000 crore for the Union government, besides arrears of Rs 30,000 crore.
Pay packages of government staff rose by an average of 35 per cent as per the recommendations of sixth Pay Commission. They also received arrears of more than 30 months due to delay in the implementation.
"The arrears resulted in robust demand for consumer discretionary products that resulted in sustained stock performance over 3-5 years," Jai Shankar, chief India economist of Religare, told
NDTV Profit.
At present, there are scattered signs of consumption demand picking up, India's economy seemed to be sputtering with latest industrial output data suggesting that factories are not producing goods and people are not buying at a pace fast enough to push growth.
Factory output growth fell to a four-month low of 3.6 per cent in September, pulled down by a muted manufacturing and consumer non-durables sectors.
Passenger vehicle sales have grown 6.22 per cent during April-September, while sales of two-wheelers have declined 0.36 per cent.
Reserve Bank of India (RBI) governor Raghuram Rajan have also placed his bets firmly on the Seventh Pay Commission's handouts to boost spending and push up "aggregate demand".
"You will see a pickup in consumption over the next few months because a) interest rates are coming down along with margin, b) there is a Pay Commission award ahead, c) households have made substantial savings because of lower oil prices and d) the government may look to implement the Swaminathan formula to raise MSP for wheat, which will help boost rural income. So we think there is a consumption recovery on the anvil, and once that plays out, you can see a turnaround in the capital expenditure too," Hemang Jani, Senior VP, Sharekhan, told
ET Now.
Pay commissions are meant to review the salary structure of Central government employees and are set up every 10 years.
Finally, the moot question is: will the Seventh Pay Commission improve the economic activity in the country by increasing consumption? We must keep our fingers crossed with the hope of some good news soon.
