The hike in salaries and pensions of 4.8 million central government employees and 5.5 million pensioners can potentially set off a cycle of spending and investment, with people expected to use higher wages to buy cars and houses.
The government, which approved higher salaries based on the 7th pay commission recommendations on Wednesday, would be hoping that the hike will prompt people to spend more and aid the broader economy revival.
Industrial output has been inconsistent in recent months. Factory output contracted again in April after a gap of two months. Industrial growth — the closest approximation of production activity of thousands of factories — shrank 0.8% in April compared with a 0.3% growth in the previous month, pulled down by a muted manufacturing and consumer non-durables sector.
“Certainly the 7th pay commission implementation will have a positive impact; we expect people will upgrade their consumer durables post increase in disposable income. This will have an impact in both urban & rural sales,” said Niladri Datta, corporate marketing head, LG India.
According to analysts, since pay hikes boost government employees’ disposable income, they have historically pushed up consumer demand. “The pay commission recommendations will boost consumption to the economy by 0.30% of GDP and increase savings by 0.20% of GDP,” said Devendra Pant, chief economist, India Ratings and Research, a ratings firm. Others also echoed similar views.
“We strongly believe that consumer spending will be on the rise. Consumer durables such as air-conditioners, refrigerators considered as luxuries in the past, have now-a-days become items of necessity. Moreover, with the rise in disposable income and scaling of e-commerce, the consumer durable industry is expected to grow by 15% in this fiscal,” said Ajay Seth, head, sales and service, Panasonic India.
The last such comprehensive hike in salaries did lead to a sharp increase in consumer spending. Car and two-wheeler sales, for instance, recorded a sharp surge shortly after the sixth pay panel payouts.
The sixth pay commission report was submitted in 2008, with the higher salaries coming into effect retrospectively from January 1, 2006.
It entitled government employees and pensioners to arrears of about `27,000 crore, a part of which was spent on buying cars and houses. Passenger vehicle sales went up nearly 20% in 2008-09 and nearly 22% the next year. Normally states follow the Centre’s lead in revising salaries and that, too, will have an impact on the economy.
“The addition to income can be expected to have a multiplier effect on urban demand in India. Such a boost to consumer sentiment should be welcome,” said Richa Gupta, senior economist, Deloitte, an audit and consulting firm.