7th Pay Commission hike would lead to an estimated consumption stimulus of 30 bps of GDP and additional tax revenues of Rs 130 billion, which could help bridge any budgetary shortfalls in 7CPC implementation, says Kotak Institutional Equities in a report.
“The government would be spending Rs 849 billion including arrears on pay and pensions. It has deferred the allowances (to be implemented prospectively) for another four months. We believe that the government has largely provided for the implementation in FY2017BE assuming that the savings from allowances will go towards pay and pensions,” Kotak Institutional Equities says.
Talking about likely impact on inflation, Kotak says, “Central government housing forms around 6% and state governments housing forms 10% of the total sample of housing in CPI. Assuming around 20-40% increase in HRA component across various pay bands for central government employees, we estimate that average FY2017 inflation may be pushed up by 15 bps compared to our base-case average, assuming the government accepts 7CPC recommendation from December.”
Kotak expects that the consumption stimulus will be only 30 bps of GDP in FY2017 from the central government’s 7CPC implementation after taking into consideration pensioners’ behavior, 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 FY2017-18E,” it says.
On Wednesday, Cabinet chaired by PM Narendra Modi approved the implementation of the recommendations of 7th Central Pay Commission (CPC) on pay and pensionary benefits. It will come into effect from January 1, 2016.
The Cabinet also decided that arrears of pay and pensionary benefits will be paid during the current financial year (2016-17) itself.
The recommendations will benefit over 1 crore employees. This includes over 47 lakh central government employees and 53 lakh pensioners, of which 14 lakh employees and 18 lakh pensioners are from the defence forces.
Government employees and pensioners will get a 2.5 times hike in basic pay and pensions under the 7th Pay Commission recommendations that will cost the exchequer annually Rs 1.02 lakh crore.