Impact of 7th pay commission very different from last one
With investments sluggish and unlikely
to pick up for another year or two, many are now betting on a recovery
in consumption demand to bump up GDP. The feeling is falling interest
rates will prompt purchases of homes and cars, and that central
government employees could turn out to be big buyers once their bank
accounts have been credited with funds following the recommendations of
the 7th Pay Commission. Savings to households from lower prices of oil
are expected to free up cash for discretionary spends while a higher MSP
(minimum support price) for wheat, if that happens, will boost farm
incomes.
However, for a variety of reasons, the
rise in consumption-demand this time around may not quite match the
spurt seen when the 6th Pay Commission’s recommendations were
implemented. As Kotak Institutional Equities points out, the economic
environment at the time—the report was implemented in 2008 but effective
from January 2006—was far less challenging than currently and there
were many other factors that contributed to the surge in consumer
demand, none of which is present today. Halving of excise duties—from
16% to 8% between February 2008 and 2009—allowed auto firms to drop
prices, and a 425 bps cut in the policy rate in a span of just seven
months made money significantly cheaper. Both moves were part of a
stimulus package meant to revive demand after the global financial
meltdown and resulted in a fall in product prices; the cost of a Maruti
Swift, for instance, fell from R6.4 lakh to R5.6 lakh or by around 12%.
That apart, the rural economy at the time was in far more robust shape
than it is today with farm incomes rising sharply over FY05-13 driven by
the MNREGA and big hikes in MSPs; the hike in MSPs for both seasons of
FY09 was particularly steep given the elections were round the corner.
As such, rural India was a lot more prosperous than now with real rural
wages barely growing.
Moreover, consumer confidence was
reasonably high as private sector investment, which rose steadily after
2004 and peaked in 2008 at 14% of GDP, had created a lot of jobs. Today,
private sector investments are at 15-year lows and corporate cash flows
are crimped with most companies highly leveraged. Given the far more
difficult environment today, it would be unwise to expect an impact of
similar magnitude on consumption demand from pay hikes following the 7th
Pay Commission’s recommendations. To be sure, the impact would also
depend on the quantum of the hike — the last time around, there was a
total increase of 120% between FY06 and FY11, translating into a
compounded annual increase of 17%, including R44,000 crore of arrears.
Even if the pay hikes are as generous, since there will be no great
delay in implementation, there will be no major piling up of arrears.
Given that the overall environment will not be as conducive as it was at
the time of the 6th Pay Commission, it is unlikely the 7th Pay
Commission will pull consumer sentiment up enough to give the economy
the boost it needs.
Source: PAlegacy
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