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Impact of 7th pay commission very different from last one

 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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