7th pay commission, good monsoon to aid consumption: BofA

Indian economy is expected to see a consumption recovery of over 1% of GDP in the second half of the year, driven by lower lending rates and 7th Pay Commission award, says a Bank of America-Merrill Lynch report.

The other factors that are likely to aid consumption-led recovery include household savings of 0.4% of GDP, on account of lower oil prices and an increase in wheat prices to implement the Swaminathan formula before the UP polls in the summer of 2017.

"We grow more confident about our call of positioning for a consumption recovery over investment after the government broadly accepted the Justice Mathur-led 7th Pay Commission," BofA-ML said in a research note.

On June 29, the Cabinet approved implementation of the 7th Pay Commission, which had recommended an overall hike of 23.5%.

One crore government employees and pensioners will get a 2.5 times hike in basic pay and pensions under the 7th Pay Commission recommendations that will cost the exchequer Rs 1.02 lakh crore annually, which the government says will have a multiplier effect on the economy.

The 7th Pay Commission awards will result in a pay-out of Rs 850 billion this fiscal, the report said adding, "In our view, the Pay Commission pay-out will boost demand for autos, consumer durables and housing".

The report further noted that rural demand should also get a fillip if the sowing months of July-August sees good monsoon.

"We expect a pick-up in rural demand with the monsoons advancing. This will further buttress our standing call of a consumption recovery in the second half of this year," the report noted.

India Meteorological Department (IMD) has forecast better than normal South-west monsoon for the year. Close to 60 per cent of rainfall and crop sowing happens in July and August.