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  1. 7th Pay Commission report decoded; here’s where the money will go

7th Pay Commission report decoded; here’s where the money will go

Pay revisions typically boost consumption, overstretch fiscal accounts and stoke inflation

By: | Updated: July 4, 2016 9:00 AM
7th pay commission sensex nifty The Seventh Pay Panel payout, however, is lower than the 40% hike after the implementation of the Sixth Pay Panel recommendations which came into effect from January 2006

With the Cabinet clearing the Seventh Central Pay Commission recommendations, the boost to private consumption stimulus would be around Rs 46,800 crore, or 30 basis points (bps) of GDP, according to an analysis done by Kotak Economic Research. The government will get an additional tax revenue of Rs 13,000 crore and households would be able to save Rs 25,000 crore.

The government will be spending an additional Rs 84,900 crore on pay and pensions in FY17. Of this, the Union Budget will bear Rs 60,600 crore, while the Railways will bear Rs 24,300 crore. A major difference between the previous pay commissions and the Seventh Pay Commission is that there is hardly any lag between the time of recommendation and implementation. As a result, the size of the arrears to be paid will be much lower compared to the payouts of the Fifth and Sixth Pay Commissions.

Kotak research estimates that the impact on savings will be 17bps of GDP and towards tax revenues it would be 9bps of GDP. An increase in private spending will push up demand for consumer durables and automobiles. Now that the central government has accepted the report of the Central Pay Commission, state governments will follow suit after a gap of six months to a year. States are likely to increase expenditure by 1.5% of GDP towards salaries and pension, which would further stimulate private consumption over the next couple of years.

Also Read: Cabinet reshuffle: Narendra Modi can’t blame ministers for reforms pullback

Past experience shows that these pay revisions typically boost consumption, overstretch fiscal accounts and stoke inflation. While the Sixth Pay Panel recommendations boosted purchases of automobiles and consumer durables and investment in real estate significantly between FY09 and FY11, several other factors—such as reduction in excise duty to 8% from 16% between February 2008 and February 2009, RBI’s reduction of policy rate by 425bps between October 2008 and April 2009 in response to the global financial crisis, and favourable government policies for the rural economy—too contributed to strong consumption demand. The sharp decline in interest rates resulted in lower EMIs for automobiles and real estate and boosted demand.

Continued strong investment by the private sector even after the global financial crisis and a quick recovery in profits of the private sector after the slump in FY09 also contributed to strong job creation and robust consumption demand. Between FY10 and FY12, private final consumption expenditure grew at 60% of GDP from 58% between FY06 and FY09.

As per the recommendations of the Seventh Pay Panel, the pay, allowances and pensions of central government employees and pensioners would rise by an average of 23.5%. The government has deferred the allowances for another four months, which would be implemented prospectively.

The Seventh Pay Panel payout, however, is lower than the 40% hike after the implementation of the Sixth Pay Panel recommendations which came into effect from January 2006. The increase in payout to government employees and pensioners will boost household savings, which dropped to 19.1% of GDP in FY15 from a peak of 25.2% in FY10.

Gross domestic savings, which also include the private and government sectors, stagnated at 33% of GDP in FY14 and FY15 from a high of 36.8% in FY08. Higher savings could give a leg-up to investment, which has declined from a peak of 38% of GDP in FY08 to 30.8% in FY15, and further down to 29.3% in FY16.

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