Consumer demand unlikely to rise on 7th pay commission payout: report

Mon, 26 Sep 2016 , Mumbai , dna webdesk

The implementation of the 7th pay commission's recommendations was expected to boost consumer demand, according to predictions made by several analysts. However, a latest report by UBS Evidence Lab refutes the claims, stating that government employees are more savings oriented. 

In August 2016, Prime Minister Narendra Modi approved the implementation of the 7th Pay Commission which recommended a 23.5% hike in salaries for more than one crore government staff and pensioners. 

This recommendation meant that the government would spend an additional Rs 1.02 lakh crore annually for the increased salary and pension payout, which was approximately Rs 40,000 crore more than the annual spending recommended by the 6th Pay Commission. 

The implementation of the salary hike for more than one crore government employees was expected to have a multiplier effect.

Experts suggested that the hike would provide a fillip to the economy by increasing disposable income which would boost overall consumption, according to a report in The Indian Express. It was also expected to benefit the consumption oriented sectors in a big way.

Pankaj Pandey, head of research at ICICI securities had stated, “For the mid-income category, the basic expenses account for roughly 40% of the salary and hence a rise in income will lead to an incremental discretionary spend. The biggest beneficiaries will be sectors such as housing, private transport, consumer durables and jewellery.”

GCPL Managing Director Vivek Gambhir had told PTI, “Overall we should see a boost in consumption in India, following the implementation of the 7th Pay Commission and the passing of GST.” 

All in all, high hopes were reflected for H2 FY17's high GDP growth estimates, revenue earnings and expected growth for consumer facing sectors.

A recent UBS Evidence Lab report gave an anti-consensus view saying that the urban demand recovery would be slower than expected. It backed this up by stating that the 7th Central Pay Commission would drive more savings than consumption, challenging the expected boost in overall consumption. 

The report said that the expected increase in consumption would be unlikely because of government households. The report said that "while the intention to spend during the festive season is higher for government households, only about 35% credited it to an increase to the Central Pay Commissions wage or pension hike. Furthermore, the spending intentions for the next six to twelve months are lower or remain similar between the government and non-government households, the report said.

The report said that most government households had plans of saving the extra money from the CPC hikes thereby having limited contribution to consumer demand. 

Thanks to inflated expectations, the report said that the valuation of certain consumer stocks is also very high and "we expect cuts".

Going ahead, however, the report said that the CPC is likely to boost demand for cars in FY18-19.