The recommendations of the Sixth Pay Commission submitted to the Union finance minister have cheered both, 4.5 million government employees and corporates in the country. While the employees can look forward to a hike of around 30-40% in their salary package with retrospective effect from January 1, 2006, companies expect their revenues to swell as a result of the likely increase in consumer spending.

This optimism can be seen in V Ramachandran, director, sales & marketing, LG India, who is gearing up to exploit the potential business opportunity. ?The combined effect of the reduction in the threshold limit of the personal income tax, rural benefits to farmers and now the Sixth Pay Commission?s recommendation points to a favourable year of business.? He adds, ?The money is going to flow in two directions. Some consumers are going to upgrade and others are going to expand the basket of their products.? The durable major is planning a big marketing initiative to promote lifestyle products focussing on this new consumer base with additional disposable income.

?Government employees in different salary slabs will have different aspirations. For the urban customer, we plan to promote high-end product ranges of home theatres and flat panel displays. For the semi-urban customers, we will push semi-auto washing machines followed by 21-inch TVs and refrigerators,? says Ramachandran.

The Sixth Pay Commission recommendations come at a point when there are enough signals that the economy is slowing down. Hardening of interest rates had an impact on industrial production as the growth in January registered a 10-month low of 5.3% against 11.6% in the same month last year. It was because of an unexpected decline in production of capital goods and a continuing downtrend in consumer durables.

Now, the beleaguered consumer durables sector, stung by a tight monetary policy and poor off-take could have something to cheer about. TK Bhaumik, chief economist, Reliance Industries Ltd, says that the arrears would certainly give a boost to the consumer goods sector. ?A part of the arrears would go for savings and rest would be used to purchase goods. Depending on when it is implemented, the manufacturing and consumer goods sector can look forward to stronger growth,? he says.

The Pay Commission is an administrative system set up by the government to determine the salaries of government employees after every ten years. The First Pay Commission was constituted in May 1946, and had submitted its report in a year.

The second panel was set up in August 1957 and had given its report exactly after two years, with a financial impact of Rs 39.6 crore to the exchequer. The Third Pay Commission was set up in April 1970 and it submitted its recommendations in March 1973. It cost the government Rs 144 crore. The Fourth Pay Commission was constituted in June 1983, and its report was given in three phases within four years and the financial burden to the government was Rs 1,282 crore. The Fifth Pay Commission was set up in 1994 and it was implemented in 1997 at a cost of Rs 17,000 crore.

If the government decides to implement the commission?s recommendation, the exchequer will have to take a hit of Rs 12,561 crore in 2008-09 alone. Besides this, the government would also have to bear Rs 18,060 crore as one time expenditure on arrears from January 1, 2006. Experts feel that about Rs 25,000 crore to Rs 30,000 crore would circulate in the market, which should be enough to spur a consumer boom.

Industry watchers also feel that since the tax collection has been buoyant for the past few years and the government had anticipated the outgo well in advance, early implementation of the proposals would not be a problem.

Meanwhile, the anticipated increase in disposable income of government employees has become a beacon of hope for the consumer durables, automobiles and two-wheelers industries, which have witnessed sluggish sales growth in the first three months of this year. The penetration of consumer durables also remains low in the country, which indicates a large consumer base of first-time buyers especially in Tier II and III cities. The consumer durables market is estimated to be worth Rs 25,000 crore and growing at 12%.

If Ramachandran is planning big marketing initiatives for consumer durables, Pradeep Jain, chairman, Parsvnath Developers Ltd, is gearing up to tap the emerging markets in smaller cities by organising road shows specially targeted at government employees. Says Jain, ?Currently, the price of property in many parts of the country has skyrocketed and it is beyond the reach of most government employees. With interest rate on savings and fixed deposits declining, people will now find investment in real estate more profitable. The arrears could be used to pay the margin money and the increase in the salary could take care of the EMIs.?

Jain has a point in targeting government employees in Tier II and III cities. A study last year conducted by global real estate consultant Jones Lang LaSalle found escalating property prices in bigger cities is the main reason for government employees to take interest in smaller metros. He feels that banks would be interested to lend to government employees, as they are safe borrowers. The same study found that only 5% government employees default on payments as compared to 20% from the private sector.

Increased investment and spending also means big business for the banking sector. SK Goel, chairman and managing director, UCO Bank, feels that more disposable income in the hands of government employees means more savings. ?Banks and financial institutions will have to devise innovative saving portfolios for their customers to mobilise the additional income and this can be invested further into productive areas, which yield higher returns,? he says.

Goel reasons that in the past few years, households have had the propensity to save and invest more. Despite inflation, saving is around 32% of the GDP and investment is round 34% of the GDP. Over the last few years, household savings have undergone some changes in composition as people are putting more of their money in financial assets than physical assets. Around 50% Indians had put their money in banks (either in savings or fixed deposits), 15% invested in insurance and the rest invested in financial instruments.

?The implementation of the Pay Panel recommendations will not only lead to rise in spending, but also a proportionate increase in savings and investments. It will be a good signal to corporate India as they will find funds for their expansion plans,? says Goel.

Will the anticipated increase in demand for consumer durables lead to any price cut? LG?s V Ramachandran feels that there would not be any price cut in durables as material cost is rising. ?The consumer durable industry like washing machines and refrigerators has been facing the high input prices for steel and copper over the last few months,? he reasons.

One of the major challenges before the Sixth Pay Commission was to prevent the attrition of talented personnel from government organisations to the private sector for higher compensation packages, challenging and result-oriented work environment and future growth prospects. In fact, the opening up of new avenues in the private sector in the last couple of years has caused a spate of movements from blue-chip public sector companies to the private sector in the country and even abroad. Various studies have shown that the average attrition rate across public sector companies is around 4% every year and they constitute the cream of the companies.

Various private sector companies also woo senior civil servants with long years of experience in project management. Besides in-depth liasioning skills, they have core competence in implementing huge infrastructure projects and they are being wooed in areas like Special Economic Zones, rural retail and infrastructure. Many civil servants have moved to companies like Reliance Industries, Citigroup, Adani and McKinsey.

The sectors that are primarily losing talent to private sector are the Army, pure and applied scientific research, infrastructure, banking, insurance and oil and gas.

For example, in the past two years Oil and Natural Gas Corporation has lost about 400 mid-level managers to the private sector. Most of them were geoscientists and engineers with 10-15 years of experience.

So will the revised pay structure help in checking the attrition of government employees to some extent? Goel of UCO Bank feels that the proposed revision in the salary structure will still not help to stop people from moving to the private sector. ?Those employees who are moving are in the much higher pay bracket and the private sector will anyway pay more to attract them,? he reasons.

Rupa Rege Nitsure, chief economist, Bank of Baroda, feels that salary is not the only reason for increasing attrition from the government sector. ?Employees prefer jobs that give them the opportunity to use their skills and abilities, challenging assignments and a transparent feedback system. Unless the government establishes a system that motivates competent officials and ensures that better performers are fairly rewarded, the risk of attrition will remain,? she says.

On an optimistic note, DK Joshi, principal economist at credit rating agency Crisil, feels that with the recommendations of the Sixth Pay Commission the issue of talent crunch in the government sector would be addressed to some extent. ?The government job will now be more attractive to many talented people who are presently working in the private sector,? he says.