Pay panel unlikely to boost consumption in a big way, say analysts

The Seventh Pay Commission’s potential to boost consumption and growth in the economy will be a lot more muted than that of its predecessor’s.

A Nomura report estimated that the implementation of the Sixth Pay Commission, which was announced in 2006, led to a rise in expenditure on automobiles of more than 25 per cent the following year, compared with a 7.4 per cent y-o-y in the previous year.

Sanjiv Bhasin, Executive Vice-President – Markets, IIIFL, expects a much smaller uptick of 10-13 per cent in revenue of auto companies starting this Diwali.

“The difference now,” Bhasin said, “is that the current correlation is with the global overhang, which is a slight dampener.”

Bull run impact “The Sixth Pay Commission coincided with the start of a very big bull market in 2006, and the payouts gave a big leg-up. Interest costs were far lower and PSU banks, which have mucked up their balance sheets in the last 10 years, had a rip roaring time then as credit and advances had really picked up. In fact, PSU banks stock prices doubled and tripled at that time,” he said.

Lending rates are higher by over 300 basis points now than when the Sixth Pay Commission increased salaries of central government employees 10 years ago.

The other major difference, Devendra Pant, Chief Economist, India Ratings and Research, said, is that there is hardly any lag between the day from when the payment is to be implemented and the date on which the payment was announced while with the Sixth Pay Commission, there was a 30-month lag.

Lower arrears this time “As a result, the size of the arrears to be paid will be negligible compared with the payouts of the Fifth and Sixth Pay Commissions.

“The fiscal impact of the arrears of the Sixth Pay Commission was so onerous that it was spread over two fiscals, FY10 and FY11,” he added.

Ratings agency Crisil estimates that the sales of automobiles (two-wheelers and passenger vehicles) increased significantly (25-26 per cent) after the Sixth Pay Commission, while consumer durables saw a growth of 2.5-3 per cent in fiscal 2010 and 2011.

Nomura believes consumer spending on recreation, education and cultural services fell immediately after the Sixth Pay Commission but recovered to rise by nearly 10 per cent in the two fiscals following the payout, while spending on clothing and footwear rose to close to 18 per cent year-on-year.

India Inc may benefit a lot less after the Seventh Pay Commission, but experts recommend picking up stocks in the automobile, housing finance and consumer discretionary sectors.

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