Additional payouts from the 7th pay commission, amounting to about Rs 65,000 crore in the current financial year, are expected to boost the discretionary demand for consumer durables and automobiles in a big way. The demand for homes of up to Rs 50 lakhs is also likely to go up. The full impact of pay commission handouts on the demand for automobiles and other consumer durables would be realised in the next two years once the states also implement their respective pay commissions probably by end 2016 or early 2017. Central and the states’ pay commissions together are likely to put huge cash (equivalent to about 1.4% of the GDP) in the hands of their employees and pensioners. “This will result in a quantum jump (of up to 25%) in the demand for refrigerators, washing machines, air-conditioners and other items like clothing and footwear,” Phani Sekhar, Fund Manager with Karvy capital, said. Such a sizable jump in demand is likely to create an upward bias, of up to 0.3%, in the current year’s GDP growth, Sekhar added.
Going forward, if the states also emulate the Centre by giving a similar hike in salaries and pensions, n the demand for such items could rise even more significantly. During the previous two pay commissions (5th and 6th), states’ wages and pensions bill rose by a cumulative 1% of states’ GDP over the two years following the implementation of the pay commission by the central government. Analysts calculate that if 1% of the total payout (1.4% of India’s GDP) is actually spent on consumption, it can boost the national GDP by over 1.3% from FY18 onwards, which is a significant jump provided the government keeps prices under control. A good double digit growth in auto sales is also expected in the next two years. In the past, car companies have introduced schemes that have made car ownership quite attractive for government employees. A similar practice is visible again, especially in government colonies.
Nomura expects the seventh pay commission’s recommendations to result in additional spending of Rs 17,400 crore (0.1% of GDP), posing a marginal upside risk to its 3.5% of GDP fiscal deficit target. With the asset sales target already looking ambitious, meeting the 3.5% target will become challenging and other expenditure may need to be trimmed. Analysts, however, do not see inflationary impact of 7th pay commission payouts. Barring the food price shocks, the CPI inflation is likely to remain within RBI’s target of 5% by March 2017.