Ashika Monthly Insight August 2016

STRONG ON CONSUMPTION
DISCRETIONARY SPENDING
Discretionary spending has strong correlation with the
economic development as the individuals trends to spend
more when his disposable income increase. Individual’s
priority is to fulfill its basic needs and after that any
residual incremental income is used to spend/invest in
purchasing homes, cars, luxury items and precious metals
based on their discretion. Government’s fiscal stimulus to
spur economic growth by way of recommending and
approving 7th Pay commission (PC) should increase the
demand for owning cars, homes and luxury items. The
increase in public sector wages and pensions should
boost urban discretionary demand, particularly for
durables such as automobiles and smaller-ticket items
like clothing and footwear and recreation services.
However, the impact of 6th PC had been robust owing to
higher percentage hike in wages and salary and 3 years
arrears as compared to 3 months arrears approved in 7th
PC. Implementation of the sixth pay commission led to a
rise in consumption expenditure on automobiles of more
than 20% the following year, compared with 7.4% yoy in
the year prior. Taking cues from previous pay commission,
it boosted consumer discretionary demand, pushed up
CPI inflation and increased the government’s fiscal
burden. Providing fiscal stimulus by ohiking wages of
central government employee also distrted the fiscal
balances of the government. For example, 6th PC, which
w a s i m p l e m e n t e d i n F Y 0 9 , raised t h e ce n t ral
government’s wage and pension bill from 2.0% of GDP in
FY08 to 2.7% in FY09 and further elevated to 3.3% in
FY10. Its impact was felt for two years as the government
staggered the payment of arrears accumulated owing to
its delayed implementation. Combined with a slowdown
in tax revenue caused by the global financial crisis, this
pushed up the fiscal deficit from 2.5% of GDP in FY08 to
over 6% in the subsequent two years. There was a similar
impact during the implementation of the Fifth Pay
Commission. Therefore the pay hikes should provide a
boost to growth, partly offsetting the growing downside
risks from slower global demand and still-weak private
sector investment. This year monsoon would play a big
role in spurting consumer demand after two consecutive
year of drought. Well spread monsoon across the country
would increase the productivity of rural areas, resulting in
improvement in purchasing power of rural people. The
demand for passenger vehicles, two wheelers, tractors,
home appliances and consumer staples are directly
correlated with the progress of monsoon during this year.
Implementation of GST from next financial year would
unlock the economic value which is concealed due to
current complexity of indirect tax structure. GST bill which
is seeking passage in Rajya Sabha would play a vital role
in economic growth as it would simplify the current
complex indirect tax structure and bring the unorganized
sector under tax purview. The Centre has been pushing
hard to build a consensus on the legislation so that it can
finally be passed in the ongoing monsoon session of
Parliament. Eventually, the implementation of GST would
create a uniform tax rate which could support the growth
of consumer demand going ahead. 7th Pay commission,
good monsoon, effect of GST and rising middle class are
the main catalysts that would drive the discretionary
spending, resulting in strong demand for Auto, Real estate,
Consumer durable goods and Retail Finance sectors.
Rising middle class income will give discretionary
spending power to people
India accounts for 3% of the global middle class with 23.6
million people. A report from Credit Suisse “Global Wealth
Report 2015” stated that there are 664 million adults
belonging to the global middle class in 2015, or 14% of
the adult population, where India has 23.6 million adults
who qualified as middle class in 2015. The growth of
wealth has been the fastest in India (second only to China)
over 15 years (2000-2015). India added 6.7 million adults
to the middle class over these 15 years, and middle-class
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