• News
  • Columns
  • Interviews
  • BW Communities
  • Events
  • BW TV
  • Subscribe to Print

Sandeep Bamzai

Sandeep Bamzai is a media professional of standing and repute having held editorial leadership positions right through his 32 year career. Visiting Fellow at think tank ORF, he is currently writing a book for Harper Collins on the Role of the Indian Pri

More From The Author >>
BW Businessworld

Disequilibrium | 7th Pay Commission Payout May Be Hot Button For Economy

The second quarter GDP numbers are better - 7.4 per cent - sequentially than the June quarter of 7 per cent, but still below par. The trajectory fortunately is northwards again and this is a good sign

Photo Credit :

For an economy where households’ spend accounts for more than half of the country’s Gross Domestic Product, while the rest comprises private investment spending, government spending and value of exports minus imports, its inherent dependence on boosting consumption is the only way to gain the breakthrough benefit. On Monday evening, the second quarter GDP numbers were better - 7.4 per cent - sequentially than the June quarter of 7 per cent, but still below par. The trajectory fortunately is northwards again and this is a good sign. Almost at the same time, news came in that India's infrastructure output grew at a paltry 3.2 per cent in October, year-on-year, unchanged from September but down from 9 per cent a year ago. Infrastructure accounts for nearly 38 percent of India's industrial output. The really good news is the uptick in manufacturing. In a big boost for manufacturing, the sector grew at 9.3 per cent versus 7.9 per cent YoY. Agricultural sector growth was reported at 2.2 per cent versus 2.1 per cent YoY. " The growth in the 'agriculture, forestry and fishing', 'mining and quarrying', 'electricity, gas, water supply & other utility services, 'construction' and 'public administration, defence and other services' is estimated to be 2.2 per cent, 3.2 per cent, 6.7 per cent, 2.6 per cent and 4.7 per cent, respectively, during this period.

The June quarterly slowdown came on the back of moderating private consumption and a deterioration in the external sector. Private consumption fell from a 7.9 per cent increase in the fourth quarter of FY 2014 to a 7.4 per cent expansion in the first quarter FY 2015. However, government consumption rebounded from a notable 7.9 per cent contraction in Q4 FY 2014 to a 1.2 per cent expansion in Q1 FY 2015. Growth in fixed investment also increased, rising from 4.1 per cent in Q4 FY 2014 to 4.9 per cent in Q1 FY 2015.

"The growth trajectory is showing initial signs of a recovery," Morgan Stanley said in a note. "However, the continued weakness in external demand and slowdown in rural consumption spending are holding back the pace of recovery."

Boosting consumption has to be uppermost in the minds of policy mavens and even as the deadlock over One Rank One Pension remains, the 7th Pay Commission (PC) payout provides some hope that it may become the instrumentality to galvanise consumption. We can neither run from this reality of re-booting consumption, nor can we hide from this. As stated earlier,India's economy is mostly driven by domestic demand, and a pay hike in wages of near 10 million government employees and pensioners from January could boost consumer spending. It is an economic reality for us and if we ignore it, we do so at our own peril.

Analysts reckon that the 7th PC implementation may result in a increase in consumption due to
a) per capita increase for Group C (90 per cent of employees) is Rs 0.12million in line with Rs 0.11 million with 6th pay commission including arrears (arrears contributing 66 per cent)
b) Although,JM Financial Research expect there may be insignificant arrears (Max 3months) this time, the incremental income and abundant financing options amidst a declining interest rate environment could provide a fillip to consumption c) Since states also increase pay with a lag, the cumulative impact could provide further impetus to consumption.
c) Further, since 53 per cent of all central govt employees and a greater proportion of state govt employees live in Tier 3 cities (as per socio-economic survey, only 5 per cent directly in rural India), there may be a minor trickle down impact on rural consumption.

The 7th Pay Commission has recommended an increase of 23.6 per cent in salaries and wages for central government employees (including railways) over and above the yearly increase that is slightly lower than expectation (30 per cent+). The central pay commission set up usually every 10 years to recommend changes to emoluments including pay, allowances and pensions for ~4.7 mn central government employees and 5.2 mn pensioners.

Almost 87 per cent of the total central government civilian manpower is covered by four major Ministries/Departments (Railways(40 per cent), Home Affairs(30 per cent), Defence (Civil)(12 per cent), Post(6 per cent) ) and 80 per cent of the total pay expenditure is incurred by them with Ministry of Railways continuing to have the largest share at 36 per cent. Significantly, pay matrix has replaced pay band and grade pay structure this time round. While the 6 pay commission reduced the number of pay scales, the 7 pay commission has further attempted to simplify the existing pay structure and prevent stagnation of employees in a given pay band by recommending a pay matrix with 18 horizontal levels corresponding to functional position (erstwhile paybands + grade pay) and upto 40 vertical positions in each level for progression

Rationalisation Of Allowances: The commission has abolished 52 allowances and 36 allowances have been subsumed in existing allowances. House rent allowance (HRA) has been adjusted downwards to 24 per cent (current 30 per cent) of basic pay in class X cities and similar revisions for other cities.

Minimum arrears: We expect the seventh pay commission recommendations to be implemented from FY17 and hence, there may not be significant pay arrears unlike the sixth pay commission when the arrears (of more than 2 years) were paid in two instalments (40 per cent in 2008-09 and 60 per cent in 2009-10).

Central govt pensions to rise by 24 per cent: There are total of 5.2mn pensioners including civilian and defence. Defence pensioners constitute 47 per cent of overall pensioners. The 7 pay commission has recommended an overall increase of 24 per cent in pensions. Further, the commission has suggested that pensioners who retired at similar pay levels should receive similar pensions.

Fiscal Deficit May Suffer In The Near Term
Pay and allowances as per centGDP to rise by 50bps: Pay and allowances as per cent of GDP is expected to rise form 1.8 per centGDP in FY16 to 2.3 per centGDP in FY17 and may later normalize. Pensions are set to increase by 20bps of GDP

The sixth pay commission resulted a sharp rise in revenue expenditure in FY09 (34 per centYoY) and FY10 (15 per centYoY) which stabilized in the later years (FY11 onwards). Similarly, with the seventh pay commission, we expect revenue expenditure to rise in line with the wage hike in FY17.

Fiscal deficit target may get stretched by 30-40bps: The impact of 7 pay commission on the central budget is to the tune of Rs 736.5bn and Rs284.5bn on the railway budget.

As per the current medium term fiscal framework, the central government has set a target of achieving 3 per cent fiscal deficit by 2018.

The fiscal deficit will be moderated due to
1. Increase in income tax (direct tax) collection: We estimate the direct tax collection could increase by 3-4 per cent over current estimates in FY17 and cushion the tax revenues
2. Increase in indirect tax on purchase of automobiles and other consumer discretionary: Indirect tax may also benefit with increase in excise collection on account of purchase of automobiles.

Consumer discretionary and automobile sales are supposed to see activity as pent up demand will adjust itself due to the 7th Pay Commission payout. Autos and consumer durables demand saw an upswing during the last pay commission: Passenger vehicles (4W) and two wheelers sales witnessed higher than expected incremental sales. The increase in wages and arrears was one of contributing factors to the growth in auto and consumer durable sales. Assuming 50 per cent of the average incremental sales in FY10, FY11 over and above the average sales in FY05-09, we estimate 170,000 additional passenger vehicles due to the 6 pay commission and additional 880,000 2wheelers sales. One may assume similar incremental sales volume in FY17 and FY18 for 4W and 2W respectively.The other factors that helped boost sales were

a) Reduction in excise duty: The government sharply reduced the excise duty from 16 per cent in FY08 to 8 per cent in FY09.
b) Lower interest rates: Following global financial crisis, RBI reduced the policy rates to 4.75 per cent by April 2009 from 9 per cent in Oct2008. This reduction in policy rates in turn led to lower lending rates adding to demand spur.

The Pay Commission payout may well prove to be the hot button for a pick up in consumption. And remember, there is an old theorem which says that economic activity moves on wheels. Ergo, consumption recovery on the back of an automobile sales pick up.