The approval by the Union Cabinet for part of the recommendations of the 7th pay commission (7th CPC) has been welcomed warmly by the capital markets especially coming after the global equity market turmoil that followed the Brexit vote. The fact that the backlog or arrears as they are called are only six months as against the thirty-two months under the 6th pay commission reflects the efficacy of the government machinery. This, coupled with the expectations of an above -normal monsoon, bodes well for overall consumption in the coming months. Stocks, especially related to discretionary consumption have reacted favourably even though it is difficult to demarcate the benefit separately for the monsoon cheer and the pay commission.
In addition to the 10 million central government employees who will benefit from the increased pay, the state governments too are expected to take cue from the centre and soon implement the pay recommendations. States typically offer hikes broadly in-line with the central pay commission albeit with a lag of one to two years. The fact that state government employees are almost treble the central government implies that the quantum of increase in pay is much larger than that of central government. We expect the state pay to increase in line with the central pay hike. However, states facing tough fiscal situation may seek to postpone the hike to next fiscal.
From an ability to drive consumption, we note that even if we do not consider the arrears that are being paid this time, the absolute increase in pay per capita is in line with the hike plus arrears (32 months of arrears) per capita observed during the 6th PC. The years post implementation of the 6th pay commission (FY09-11) show that increased income indeed translated into higher discretionary spending and hence, we expect a positive spill-over on consumption this time around too.
During FY09-11, auto sales witnessed double-digit growth with passenger vehicles (PV) segment growing around 25-30 per cent YoY and two-wheelers (2W) segment nearly 25-26 per cent YoY. Drawing from past, our analysts have built in expectations of faster growth in sales of two- wheelers, four- wheelers, and other consumer appliances/durables and retail financing in FY17 over FY16. Moreover, with agri-income expected to grow by 20 per cent on the back of an above normal monsoon, we should also see an improvement in the delinquency rates of rural financiers.
While that is the case above and given that the changes to the allowances have probably been pushed to FY18, the higher outgo does not result in a material risk to the fiscal balance, at worst, an impact of 10-15bps of GDP. Now that there is clarity on the expenses, any worry on the fiscal front, if at all, hinges on the success of upcoming mega telecom auctions. While the govt. expects to receive Rs.990bn (66bps) in revenue, including upfront payments of Rs.600bn, from the telecom sector in FY17, commentary from leading operators are hinting at the possibility of slight disappointment. From that perspective, spectrum auctions remain crucial to maintain the government spending momentum into 2HFY17.
(The author is head of research, JM Financial Institutional Securities)