Analysts expect a recovery in consumption will help swing the economy out of its extended slump on implementation of the Seventh Pay Commission’s recommendations, made public on Thursday. The Commission has recommended a 23.5 per cent hike in wages, allowances and pension of Central Government employees, both working and retired.
Perfect timing The research report by credit rating agency Crisil said the timing of the Pay Commission would be helpful, since the economy is struggling to get the private investment cycle going and the additional disposable income would provide a non-inflationary boost to consumption and investment.
Crisil estimates that after accounting for taxes, if households spend 70 per cent of the incremental payout, private consumption would rise by 0.4 per cent. It would rise by 0.3 per cent if they spend 50 per cent. Either way, with inflation expected to remain benign, real purchasing power of households is expected to improve.
A report by Bank of America-Merrill Lynch believes that besides the higher payouts to the over one crore Central Government employees and pensioners, consumption will be further boosted by softer lending rates, increased household savings (due to falling oil prices) and a possible 10 per cent hike in the minimum support price for wheat before the Punjab and Uttar Pradesh State elections in early 2017.
The combined effect for the economy would be 4-5 per cent incremental growth in sales of cars and two-wheelers while consumer durables are likely to see additional growth of 1-1.5 per cent in fiscal 2017, according to the Crisil forecast, which also expects capacity utilisation to improve. “And if supported by normal monsoons, which will lift the sagging rural demand, the private corporate investment cycle could materially lift towards the second half of fiscal 2017,” the report added.
However, these predications are based on consumer behaviour following the announcement of the Sixth Pay Commission in 2008.
A report by Religare also expects consumer discretionary companies to benefit from the recent announcement. But it sounds a note of caution.
The report said that “stock or sectoral performance post the Sixth Pay Commission is not a good guide,” mostly because it came with 30 months of arrear payments. The current recommendations don’t.