7th pay commission: Inflation to get marginal push

FM described the seventh pay commission hike "a mixed bag"

The seventh pay commission boost to salaries of government employees is expected to fuel the economy on higher consumer spending amid global headwinds like 'Brexit' creating uncertainty.  However, it may also stoke up inflation in the services and consumer durables sector moderatley.

According to economists, the expected 20-25% rise in government salaries will have a multiplier effect on urban demand, which in turn may accelerate economic growth to 7.9%  in 2016-17. 

Finance minister Arun Jaitley described the seventh pay commission hike "a mixed bag". 

“It will generate demand, but more money supply will also impact inflation. So it is a mixed bag," Jaitley said in a briefing on the Cabinet decisions, which included go ahead to the commission recommendation. 

India Ratings estimate the higher payout to boost consumption to the economy by Rs 45,100 crore , about 0.30% of Gross Domestic Product (GDP) and increase savings by Rs 30,710 crore, which is 0.20% of GDP.

The approved recommendations of the Seventh Pay Commission on pay and pension would put more disposable income in the hands of 4.7 million employees and 5.3 million pensioners.

The implementation is expected to boost demand for consumer durables and services during the financial year.

“Implementation of the Seventh Pay Commission’s recommendation will spur demand for mid-ticket sized consumer durables as well as services. The staggered pay revision by several state governments over the next two years would also emerge as a demand driver," said Aditi Nayar, senior economist, ICRA.  

On likely upward pressure on prices Nayar said that there could be some uptick in services inflation while the impact on inflation of manufactured products would be contained given moderate  capacity utilisation. "Overall, the pay commission is positive for growth and poses a modest risk to the inflation trajectory,” she said.

The Seventh Pay Commission had recommended a 23.5% increase in pay, pension and allowances under a ‘business as usual’ scenario. It had envisaged an increase in pay of Rs 39,100 crore, increase in allowances of Rs 29,300 crore and increase in pension of Rs 33,700 crore, taking the total financial impact for 2016-17 to Rs 1.02 lakh crore. However, payment of allowances has been deferred. 

D K Joshi, chief economist, Crisil said that the pay commission implementation would push GDP to a 7.9% growth rate.

"The domestic demand push as well as good monsoon will drive growth. We estimate GDP growth at 7.9% in 2016-17. Besides arrears payout will also mildly support consumption demand, but not as much as it did earlier when the lag in implementation was wider," said Joshi adding that inflation is expected to stabilize at 5%. 

Richa Gupta, senior economist, Deloitte said that increase in the disposable income in the hands of about a million of government employees and pensioners would help India at the time of global uncertainty.

"Given the uncertain external environment, Indian economy would have to continue to look to internal factors to fuel its growth. Therefore, such a boost to consumer sentiment should be welcome," she said.

However she added that the positive effect is expected to be balanced by a possible negative impact on the already rising consumer inflation.

Consumer price index based inflation spiked to a 19-month high of 5.76% in June.

"Though consumer price inflation may inch up somewhat due to higher prices of services, impact on wholesale price index is likely to be muted due to the counter balance provided by the deflation in commodity prices and the availability of excess capacity in several manufacturing sectors," according an India Ratings note.

Industry chambers, including CII, Ficci, Assocham, said  the move would lift consumer sentiment and would be positive for the economy.