Pay bonanza from Seventh Pay Commission

    Pay bonanza from Seventh Pay Commission

    Pay bonanza from Seventh Pay Commission

    Beginning 2016, aboutfive million central government employees could gain a windfall payout based on the Seventh Central Pay Commission’s report. The industry, as much as government employees, iskeenly tracking this. Lumpsum bonuses boost discretionary spending. This is more soas beneficiaries of the expected payoutaccountfor about a third of the Indian middle class consumer segment.

    Past experience is driving this optimism. The Sixth Central Pay Commission’srevised pay structure, announced in March 2008, propped up consumer spending in the backdrop of international financial crisis and a general economic slowdown. In effect, it translated into a stimulus for the economy, visible in later years’ data.

    Government expenditure on civilian employees’ pay grew 62 per cent and 33 per cent in 2008-09 and 2009-10 respectively due to arrears’ settlement. Pay and allowances grew to 1.4 per cent of total union government expenditure in 2009-10, against 0.93 per cent in 2007-08 and 1.07 per cent subsequently in 2008-09.

    figure-1Source: Brochure on pay and allowances of central government civilian employees

    Even as there is no deliberate segregation of consumer expenditure data across buyers’ occupation, disparate data can be collated to gauge the impact of the Sixth Pay Commission. NSSO’s quinquennial consumer expenditure surveys shows the pattern. The expenditure on consumer durables by urban households reported discernible rise in its contribution to overall spending. This takes place at the same time when the pay and allowance arrears’ disbursals took place.

    figure-2Source: NSSO report [68th round on consumer expenditure of households]

    The same dataset shows a rise in share of select consumer durable categories in the urban household expenditure. While it is tenable to argue that the said rise could be attributed to a multitude of factors, our contention is that the purchasing power boost during the concerned period makes it a strong case.

    NSSO-defined categories show that automobiles, electronics (PCs, laptops and mobile handsets) as well as gold ornaments rose in their share of household expenditure. One may also note that the segment classified as ‘other durables’ had a similar jump and is likely to include the other typical fast moving consumer goods (e.g. white goods) that NSSO surveys generally don’t lay emphasis on.

    figure-3Source: NSSO report [68th round on consumer expenditure of households]

    The macro estimates when drilled down to select micro-level analyses help buttress the anticipated potential.Segments such as consumer durables and residential housing particularly hold significance.Major consumer durables’ firms registered jump in sales during 2010. This particularly holds true for the market leaders in refrigerators, mobile phones and televisions.

    figute-4India’s automobile sales reported a sharp turnaround (25-28 per cent) in both passenger vehicles and two-wheelers in the same time period when arrear disbursals took place.

    Figure 3: Automobile sales trend                                             Figure 4: Two-wheeler sales trend

    figure-5

    Many government employees utilised the arrears for margins or upfront down payments on housing mortgages and automobile loans. These two segments drove growth of credit deployment during the concerned period. The impact is mostly discerned through the spikes in trend.

    figure-6

    Outlook:

    Government sourcesindicate that the anticipated jump in government employee salaries could be in the range of 30-40 per cent. And the central government, on its part, seems to be in agreement towards a timely implementation of this, which is w.e.f. January 2016. This translates to a purchasing power of about 5 million employees and an almost equivalent number of pensioners.

    In this context, one can expect a much-needed stimulus for the key sectors such as real estate which is presently going through an extended trough. Tier-3 and 4 cities have a significant share (approximately 50-60 per cent) of government employees in middle class consumer segment. This segment can drive the discretionary expenditure towards the typical housing and consumer durables’ segment discussed above.

    There is however also a potential risk of inflationary pressure. Again, going by past episode, inflation rate had spiked to 12 per cent in 2010 which is when the impact of arrears would have been felt. The same cannot be overruled now. If that turns out to be the case, it can dampen some of the expected improvement in corporate earnings and growth prospects.

    However, considering all factors, the industry can still look forward to thisgreat public largesse to kick start their growth engines.

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