The implementation of the seventh Pay Commission report will boost consumption-driven recovery in the domestic economy, analysts say. The sharp hike in salaries of central government employees is likely to trigger demand for affordable homes and consumer durables such as cars, two-wheelers and other electronic items.
(Read: Seventh Pay Commission For 23.5% Salary Hike: 10 Facts)
"The seventh Central Pay Commission report should result in a large consumption stimulus for the economy in FY2017-18... We expect automobiles, consumer durables and real estate sectors to benefit from the largesse," said Sanjeev Prasad of Kotak Institutional Equities. According to the seventh Pay Commission proposals, salaries of central government employees will go up by 23.6 per cent. Pensioners will get 24 per cent hike. The move will benefit nearly 10 million people.
For the economy, the additional expenditure of over Rs 1 lakh crore, will provide a "sizeable" stimulus to consumption, Kotak Equities said in a report.
The acceptance of the report will result in additional expenditure of Rs 74,000 crore for the central government for 2016-17 fiscal year. The rest Rs 28,000 crore will reflect in the Indian Railway's expenditure.
However, the pay hikes are likely to add to inflationary pressures, which means interest rates could remain at current rates for a sustained period of time, analysts say. Additional expenditure for increased salaries would also impact the government's fiscal consolidation.
The additional expenditure for salaries is equivalent to 0.65 basis points of GDP, out of which about 45 basis points will reflect in the central government's 2016-17 Budget.
"The sharp increase in government expenditure on central government employees' pay, allowance and pension will effectively rule out any meaningful fiscal consolidation in FY17," Kotak said.
The government had targeted FY17 fiscal deficit at around 3.5 per cent and FY18 fiscal deficit at 3 per cent of GDP.
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