Probable Implications of the 7th Pay Commission

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The Union Cabinet on Wednesday cleared recommendations of the 7th Pay Commission. Financial dailies report that nearly 4.8 million employees and 5.5 million pensioners are set to benefit from this recommendation.

Stating the nitty-gritties briefly, the commission recommended an overall increase of 23.55% in the salary of central government employees. The hike is also the same for the pensions of those who have retired from central government jobs.

As an effect of this, an aggregate outflow of Rs 1,020 billion would flow from the government's kitty to 10 million central government employees and pensioners in the current fiscal year. Furthermore, the increase will take place retrospectively from January 2016.

The wage hike is expected to deliver a potential boost to the consumer economy. Not only that, but the recommendation will have a trickledown effect across various sectors too. Let us look at some of these sectors and how will they be affected in the coming days.

The biggest beneficiaries in the pack could be the automobile industry and the real estate industry.

An article in Business Standard suggests that government employees and pensioners accounted for 10-15% of total passenger vehicles sold in 2015. Also, if one has to go by historical analysis, payment of arrears and pay hikes lead to immediate spike in auto sales. This was evidently seen in FY09 and FY10 after the 6th Pay Commission. Furthermore, rural spending may also see a push as many beneficiaries live in rural areas. And increased rural spending may also mean a revival in auto sales.

Moving on to the real estate sector... Real estate prices have been subdued for a while now. And a major reason for this was a fall in demand as prices of properties were too high as compared to most people's income. As Vivek Kaul, editor of Vivek Kaul's Diary, points out in one of his many articles on the topic... 'The major reason Indians are not buying as many homes as they were in the past is because prices are too high for most people's income.' So, the increase in salaries could lead to a rise in housing spends. And the ripple effect of this would be benefit to the real estate sector.

Apart from the above, FMCG and banking sectors will also see an increased spending push on the back of 7th Pay Commission.

The hike in salary could drive consumption of FMCG and consumer goods. An increase in demand of these goods will mean an uptick for FMCG sector.

Banks are likely to see strong credit growth. This is because a hike in salary would result in increased spending and needs. This would further boost the demand for retail loans and benefit the banking industry.

Apart from the above, there are many implications that the 7th Pay Commission would have on the Indian economy.

However, the broader question that we have is how long will this momentum last? Will the economic stimulus help improve GDP growth over the long-term?

We believe that the development will reap short-term benefits. However, the same could not be said for the long-term. This, in our view, is because the private sector is typically a better and more efficient user of capital than the government.

As a result, the momentum led by the 7th Pay Commission may be short-lived. The quality of demand would have been better if it were a result of genuine job creation and an actual rise in productivity.

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