Will the 7th Pay Commission payout boost consumption?

The 7th Pay Commission has proposed around 23.6% hike in salary, allowances and pension for government employees and pensioners. If accepted, the recommendations would be effective from January.

Also Read: 7th Pay Commission announces bonanza for central govt staff

The changes are estimated to cost an extra Rs 1.02-lakh crore per year to the government from FY17 onwards.  Of this total financial impact, Rs 73,650 crore will be borne by the general budget and Rs 28,450 crore by the Railway budget. Going ahead, analysts expect a similar hike by the State governments.

Most analysts say that the measures announced could provide a boost to overall consumption over the long run, and list automobile, consumer durables and the real estate sectors as the key beneficiaries. The four-wheeler segment in the auto space, they say should benefit the most.

"We expect automobiles (four-wheelers, in particular), consumer durables and real estate sectors to benefit from the largesse. Although current demand conditions are somewhat subdued in both the sectors, the additional funds in the hands of central and state government employees should be a positive for volume growth of the two sectors," points out a Kotak Institutional report.

Also Read: Higher salaries, OROP, incentives to short service officers

Rahul Agrawal of Religare Institutional Research, too, expects the implementation of CPC and state pay commissions (at a later date) to boost India's consumption demand and benefit consumer discretionary companies such as Bajaj Auto, Maruti Suzuki, Hyundai Motors, Jubilant FoodWorks, Bata, Asian Paints, Voltas and KJC Kajaria Ceramics from FY17-18 onwards.

Within the four-wheeler auto segment, Nomura expects Maruti Suzuki to benefit the most as its products in the entry segment would appeal to these employees.

"After the Sixth Pay Commission, MSIL's sales to government employees rose from 4% of volumes in FY08 to 14% in FY11. Over the years, MSIL has made special efforts to tap target customers by having focussed schemes for each of the departments. This has helped the company sustain momentum. Even in FY15, government employee sales for MSIL were around 17%. Thus, MSIL will likely corner a higher share this time as well," Kapil Singh and Siddhartha Bera of Nomura said in a 19 November report.

Also Read: Pay panel recommendations at a glance

Nomura's analysis indicates that Seventh Pay Commission can lead to around 5% - 7% incremental volume CAGR over next two years (FY17-18) for passenger vehicles and a modest 2% - 3% volume for the two-wheeler segment. This assumes a base scenario of around 15% - 20% salary hike under the Seventh Pay Commission and nominal arrears if implemented within 6-9 months after January 2016. In the passenger vehicle segment, it assumes people with around Rs 500,000 gross salary as a potential car buyers.

G. Chokkalingam, Founder & Managing Director, Equinomics Research & Advisory, however, has a different view and says the recommendations will not boost consumption in a meaningful way.

"The additional income in the hands of central government employees constitutes about 0.5% of projected GDP in FY17. This additional income may not give any boost to the consumer goods manufacturers as a major part of this would be chucked away from them by revival in inflation rates and further higher duties (further on fuels as long as oil price remains subdued) & taxes (especially on services) likely to be imposed by the government to meet its growing expenditure needs," he says.

Article Source: Business Standard.

7th Pay Commission announces bonanza for central govt staff - Business Standard

The Seventh Central Pay Commission has proposed a hefty 23.55 per cent hike in salary, allowances and pension for 4.8 million government employees and 5.5 million pensioners. If accepted, the recommendations of the commission, headed by retired judge A K Mathur, would be effective from January.

The recommended hike, contained in a 900-page report, is over 11 percentage points lower than the 35 per cent suggested by the sixth pay commission.

The panel also virtually expanded the one rank, one pay commission to all civilian central government servants, paramilitary forces and defence personnel.

The financial impact of the report, presented to Finance Minister Arun Jaitley on Thursday, would be Rs 1.02 lakh crore during 2016-17. The total salary and pension bill of the government would work out to be Rs 5.36 lakh crore in the financial year, 23.55 per cent more than the Rs 4.33 lakh crore that would have come if the commission's report was not there.

Of the total financial impact of Rs 1.02 lakh crore, Rs 73,650 crore will be borne by the General Budget and Rs 28,450 crore by the Railway Budget.

"In order to implement the 7th pay commission recommendations, a secretariat will be set up under the expenditure secretary. The government will take a final decision, after examining the recommendations expeditiously," Jaitley said.

The total impact of the panel's recommendations would be an increase of expenditure by 0.65 percentage points to the country's gross domestic product (GDP), compared with 0.77 per cent in case of the previous pay panel.

However, finance secretary Ratan Watal was hopeful that the government would not breach its fiscal deficit target at 3.5 per cent of GDP for 2016-17.

The basic salary hike recommended is 16 per cent, while that of housing rent allowance, other allowances and pensions are 138.71 per cent, 49.79 per cent and 23.63 per cent, respectively.

Pension of the retired staff would increase 23.69 per cent at Rs 1.76 lakh crore, against Rs 1.42 lakh crore.

Since the basic pay has been revised upwards, the commission recommended that house rent allowance (HRA) be paid at the rate of 24 per cent, 16 per cent and eight per cent of the new basic pay for Class X, Y and Z cities, respectively.

The commission also recommended that the rate of HRA be revised to 27 per cent, 18 per cent and nine per cent, respectively, when dearness allowance crosses 50 per cent, and further revised to 30 per cent, 20 per cent and 10 per cent when dearness allowance crosses 100 per cent.

After receiving a lot of flak for the new pension system, the panel suggested a number of steps to improve its functioning by establishing a strong grievance redressal mechanism.

The minimum pay recommended is Rs 18,000 per month and maximum at Rs 2.5 lakh for the Cabinet Secretary. The current salary of the Cabinet Secretary is capped at Rs 90,000 a month. It proposed a consolidated pay package of Rs 4.5 lakh and Rs 4 lakh per month for chairpersons and members, respectively, of select regulatory bodies.

A revised pension formulation for civil employees, including armed central armed police force personnel as well as for defence personnel, who have retired before January 2, 2016, has been recommended.

This formulation will bring about parity between past pensioners and current retirees for the same length of service in the pay scale at the time of retirement.

The 7 pay commission has also proposed a status quo on the retirement age of central government employees at 60 years. The chairman and other member Rathin Roy recommended the age of superannuation for all central armed forces personnel to be raised to 60 years from 58 years, another member Vivek Rae did not agree with it.

Replacing the present system of pay bands and grade pay with a new pay matrix has also been mentioned in the seventh pay commission report.

Grade pay has been subsumed in the pay matrix. The status of the employee, hitherto determined by grade pay, will now be determined by the level in the pay matrix. However, the rate of annual increment is being retained at three percent. It also recommended a fitment factor of 2.57, which will be applied uniformly to all employees.

The commission also proposed that annual increments not be granted in the case of those employees who are not able to meet the benchmark either for modified assured career progression or for a regular promotion in the first 20 years of their service.

There was no unanimity of views in case of advantages given to Indian Administrative Service and Indian Foreign Service employees for promotion vis-a-vis Indian Police Force and Indian Forest Service employees.