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  1. 7th Pay Commission report: Not Rs 1 lakh cr, actual spend may be just half that

7th Pay Commission report: Not Rs 1 lakh cr, actual spend may be just half that

Experts believe government employees are expected to save about a fourth of the amount while giving back around 25% in the form of taxes.

By: | Updated: June 30, 2016 7:27 AM
SKS interest rate One reason the impact might be more subdued this time is because arrears will be be paid for just six or seven months whereas the last time arrears were paid for nearly three years (January 2006-September 2008), estimated at around Rs 44,000 crore. (Reuters)

The expected consumption bonanza from the 7th Pay Commission is unlikely to be more than half the Rs 1 lakh crore most are looking at. Experts believe government employees are expected to save about a fourth of the amount while giving back around 25% in the form of taxes. The spend in FY17 will be close to Rs 43,000 crore since the government will pay out Rs 85,000 crore, having postponed the payment of allowances to probably FY18.

While stocks of auto manufacturers, two-wheeler makers, home loan companies and property firms rallied smartly, the combined spend of Rs 50,000 crore or roughly 0.66% of private final consumption, while not insignificant, may not boost demand quite as positively as in 2009 and 2010 when salaries rose following the 6th pay panel’s recommendations. As such there is unlikely to be a consumption boom that results in a spurt in demand for automobiles or consumer durables, this time, say experts. If, however, state governments follow up with their salary increases quickly demand could get another fillip. It is also not clear how soon the government will announce pay hikes for PSUS and, for instance, teachers.

Also read | 7th Pay Commission report: Babus set to get another Rs 84,933 cr extra; here’s why

“The overall effect on consumption and inflation are likely to be more moderate this time around than in 2009 and 2010 because the magnitude of the spends is somewhat smaller,” Saugata Bhattacharya, economist at Axis Bank, observed. “The recommended hike as a share of GDP was much higher at the time,” Bhattacharya said.

One reason the impact might be more subdued this time is because arrears will be be paid for just six or seven months whereas the last time arrears were paid for nearly three years (January 2006-September 2008), estimated at around Rs 44,000 crore.

Analysts at Kotak Institutional Equities believe other factors such as monetary stimulus — a cut of 425 basis points in the policy rate — and fiscal stimulus by way of halving excise duties on automobiles were a big factor driving consumption after the sixth pay panel’s hikes.

Also, the payment of allowances has been postponed till a committee assesses the feedback from a section of government employees. In general, the economic environment in 2009 and 2010 was better despite the outbreak of the global financial crisis in late 2008. Economists observe the corporate sector was able to recover from the effects of the crisis and private sector investment remained reasonably strong. As such, earnings recovered helping create more employment opportunities and that contributed to a bounce in consumption.

Consumer goods manufacturers, not surprisingly, welcomed the hike. “The salary hike for officials would considerably help increase demand for all consumer sectors, including FMCG, consumer durable, auto and real estate, as there will be more disposable income in the hands of the employees,” said Adi Godrej, chairman, Godrej Group.

– Spend in FY17 close to R43,000 crore as payment of allowances put off to probably FY18

– Impact more subdued this time as arrears for just six or seven months versus nearly three years last time

– If state governments follow up with their salary increases quickly, demand could get another fillip

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