8th pay panel payout likely to trigger rate hike cycle in FY27: Report

The Eighth Central Pay Commission (CPC) payouts are likely to tilt the growth-inflation balance somewhat ‘unfavourably’ and kick off the Reserve Bank of India's (RBI's) rate hike cycle in late FY27 or FY28, says a recent report by private think tank QuantEco Research. 

 

According to the report, the Eighth CPC is facing administrative delays. And, the final implementation by the commission may see a lag of at least one year. This implies that revised payouts will be disbursed with sizeable arrears.

 

This will have implications for growth as well as inflation. 

 

Payout with sizeable arrears will hit core inflation harder, as it propels demand for goods and services overtime, and leads to an instantaneous reset of housing rents. 

 

“Payout with arrears, though, will offer a degree of growth support via consumption. It will also exert inflation pressure (via a reset in the housing component as well as an increase in demand for other ‘core’ components) higher,” the report notes.

 

Starting February, the central bank's Monetary Policy Committee (MPC) had cut the repo rate by 100 basis points (bps).

 

In its latest review meeting on August 6, it unanimously decided to keep the policy rate unchanged at 5.5 per cent.

 

It maintained a neutral monetary stance and cut the inflation outlook for the current financial year by 60 bps to 3.1 per cent. 

 

The report further said that a delay in the CPC's payouts will mean that the fiscal impetus to growth — which was earlier pencilled for FY26 — is likely to get pushed to FY27 and early FY28. 

 

“Historically, it is seen that lump-sum payouts with arrears propels urban discretionary consumption. This is a classic real-world application of Engel’s law. Household spending is biased towards greater purchases of big-ticket goods such as cars, consumer electronics, and services such as air travel. As a corollary, a part of the increase in disposable incomes will also make its way into savings — possibly bank deposits and equity investments,” the report added.

 

Besides, the report also notes that 8th CPC’s fitment factor could be close to 2, as compared to 2.57 of the 7th CPC.

 

This will translate into a revision in minimum pay to ₹35,000- 37,000 (from ₹18000 as announced by 7th CPC).

 

The total cost to the exchequer, for revision in pay, allowances and pensions could be in the range of ₹2-2.5 trillion.

 

This is more than double the 7th CPC cost pegged at ₹1 trillion.

 

“Assuming a Marginal Propensity to Consume (MPC) between 0.6 and 0.7, we estimate the impact of 8th CPC to be 65-80 bps on annualised private final consumption expenditure (PFCE) growth and 40-50 bps on GDP growth. With CPC payouts adding at least 0.6 per cent to the fiscal deficit to GDP ratio, the government will have to create fiscal space for its financing,” the report said.