Cabinet’s pay hike nod to give huge demand push to growth

Implementation of the much- awaited pay hike for over 1 crore central government employees and pensioners will be a positive for the economy as it will push up consumption although its impact on inflation is likely to be moderate, economists say.

The Cabinet, headed by Prime Minister Narendra Modi, on Wednesday cleared the recommendations of the 7th Pay Commission according to which the overall hike in salary and allowance of central government employees and pensioners comes to 23.5 per cent. 

Experts said the higher pay out will boost consumption demand, especially for consumer durables and services. This domestic demand push would help India clock 7.9 per cent growth rate in the current fiscal, up from 7.6 per cent in 2015-16.

“Implementation of the 7th Pay Commission recommendations will have a positive impact on demand for consumer durables and services. Overall it is positive for growth with modest risk on inflation,” ICRA Senior Economist Aditi Nayar said.

Besides, at a time of global headwinds arising out of Britain’s exit from European Union (commonly termed Brexit), the increased pay out to over 1 crore government employees and pensioners would boost GDP growth to 7.9 per cent in 2016-17, up from 7.6 per cent a year ago. 

“The implementation of 7th Pay Commission comes in at a time when globally we are facing downside risk from brexit. The domestic demand push as well as good monsoon will drive growth. We estimate GDP growth at 7.9 per cent in 2016-17. Besides arrears pay out will also mildly support consumption demand,” Crisil Chief Economist D K Joshi said. 

The 7th Pay Commission had recommended 23.55 per cent overall hike in salaries, allowances and pension involving an additional burden of Rs 1.02 lakh crore or nearly 0.7 per cent of the GDP. The recommendation would be effective from January 1, 2016. 

As regards its impact on inflation, Nayar said there could be some uptick in services inflation, while the impact on manufactured inflation would be contained given moderate capacity utilisation. Increased payout, including arrears, might lead to higher spending, which would in turn boost consumption demand, thereby spreading the risk of inflationary pressures.

“The decline in global crude and commodity prices as well as good monsoon would act as an offsetting factor for any pressure on prices as result of 7th Pay Commission,” Joshi said. The pay panel had in November last year recommended 14.27 per cent hike in basic pay at junior levels, the lowest in 70 years. 

The previous 6th Pay Commission had recommended a 20 per cent hike which the government doubled while implementing it in 2008. After considering the increase proposed in allowances, the hike in remunerations comes to 23.55 per cent.

Moreover, implementation of the 7th Pay Commission recommendations will give a much-needed boost to demand in the consumer durables sector, which has witnessed sluggish sales in the last couple of years, industry players said.

Terming the Seventh Pay Commission as key to boosting demand especially when the global economy is reeling under the Brexit impact, Consumer Electronics and Appliances Manufacturers Association (CEAMA) President Manish Sharma said consumer spending is expected to rise. “We strongly believe that consumer spending will be on the rise owing to an increase in income levels by 23.55 per cent.

“With the rise in disposable income and scaling of e-commerce, the consumer durable industry is expected to grow by 15 per cent in this fiscal,” Sharma said in a statement.

Echoing similar sentiments, South Korean manufacturer LG said that both urban as well as rural sales will improve. “Certainly Seventh Pay Commission implementation will have a positive impact. We expect people will upgrade their consumer durables post increase in disposable income,” LG India Corporate Marketing Head Niladri Datta said.