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 will approve higher salaries based on the seventh 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.
According to broking and research firm Nomura, since pay hikes boost government employees’ disposable income, they have historically pushed up consumer demand.
“A category-wise breakdown of consumption shows discretionary spending on automobiles, clothing and footwear and expenditure on education have historically risen in the years following previous pay commissions,” Nomura said in a research note in November prepared ahead of the pay commission’s report to the government.
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 Rs 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.