Will the 7th Pay Commission payout boost consumption?

1. 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

2. Motors, Jubilant FoodWorks, Bata, Asian Paints, Voltas and KJC Kajaria Ceramics from FY17-18 onwards. Within the four-wheeler auto segment, Nomuraexpects Maruti Suzukito 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 panelrecommendations 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.