8th Pay Commission: How Higher Fitment Factor Can Lift Markets — JP Morgan Explains

The 8th Pay Commission, which will result in a significant hike in the salaries and allowances of central government employees, is also seen as one of the key factors potentially contributing to the upward climb of the Indian stock market, according to a note released by JPMorgan.

The multinational bank, in its research report dated Nov. 26, explained that 8th Pay Commission will lead to "consumption acceleration", which in turn will be a key factor "shaping the markets" in coming years.

A jump in consumption will boost the earnings of India Inc., and healthier bottom lines are generally considered as crucial in attracting institutional investors to the Indian markets.

This 8th Pay Commission-powered consumption story, however, hinges on the fitment factor or the multiplication unit used for salary revision.

The commission, headed by Justice (retired) Ranjana Desai, will meet various stakeholders over the next several months before submitting its report to the Centre. The report will include the proposed fitment factor and other modalities for salary revision.

The panel, formally constituted in early November, has been given an 18-month deadline by the government to submit its report.

A higher fitment factor will lead to a sharper revision in salaries and pensions, which will in turn boost the disposable income of over 1 crore central government employees and pensioners.

In 2016, however, the 7th Pay Commission's fitment factor led to a "smaller 23–25% salary hike with minimal arrears", leading to a "more moderate boost in everyday spending", it added.

Notably, the fitment factor recommended by the 7th Pay Commission was 2.57, which was higher as compared to what was implemented under the 6th Pay Commission. However, the effective wage hike was lower as the dearness allowance, which stood at 125% of the basic pay in 2016, was reset to zero.

Currently, the DA stands 58%, and is expected to at least cross 65% of the basic pay by the time the 8th Pay Commission comes into effect. Since the DA component will be much lower as compared to what it stood in 2016, a lower fitment factor can also result in a sharper real-wage growth for employees.

JPMorgan, citing media reports, said it sees a fiscal impact of $42 billion to $44 billion (Rs 3.7 lakh crore to Rs 3.9 lakh crore) on account of 8th Pay Commission's implementation. This will be significantly higher as compared to the estimated impact of Rs 1.02 lakh crore on the exchequer back in 2017, following the 7th Pay Commission's rollout.

This $42–44 billion bonanza may "stimulate demand in consumer sectors such as automobiles, consumer durables, and potentially mid/low income housing", JPMorgan said.

"The consumption boost may be especially pronounced in Tier II and III cities, where the largest proportion of government employees reside," it added.