Ashika Monthly Insight August 2016

STRONG ON CONSUMPTION
Source: Motilal Oswal Presentation; Note: Discretionary items include Health
care, Education & Recreation, Communication, Transportation, Personal
products & services, Housing & Utilities and Food, beverages & Tobacco
7th Pay commission to boost consumer demand
Government approved a 16% increase in pay and 23.6%
hike in pensions for central government employees, in
line with the seventh pay commission’s recommendations.
However, government refrained from approving 63%
increase in allowances. The 7th PC will affect 4.7 million
central government employees and 5.3 million pensioners
and it will be implemented from January 1, 2016. 7th PC
payout will be favorable for consumption though its
impact on aggregate demand would be less than 6th PC.
Payout this time is likely to be ~1.2% of GDP over 2
years, which would be nearly half of what was realized
under 6th PC. In 6th PC the average pay hike was 60%
and total payout for government was 2.5% of GDP over 2
years. Further, in 7th PC the time arrears are just for 3
months versus 3 years in 6th PC. Higher wages would
drive demand growth for consumer discretionary items
such as automobiles, clothing and footwear. Rise in
automobile growth is considered as an indicator of
economic boom which grew over 20% in FY10 compared
with 7.4% in the year prior to the 6th PC implementation.
Historically, it had been noticed that wage hike by
government stroke higher CPI inflation due to increase in
HRA of government employees and pay rise which boost
discretionary demand. Post the implementation of 6th PC
CPI services inflation rose from 4.4% in FY08 to 7.4%
during FY09. Higher disposable income will find an outlet
through both discretionary categories as well as staples.
This will not only spur the demand, but also give
economic growth a fillip. According to India Ratings &
Research, the pay package will boost consumption in the
economy by Rs 45,110 crore (0.3% of GDP) and increase
savings by Rs 30,710 crore (0.2% of GDP). The report also
estimated that the central government’s net tax revenue
(after sharing with states) will increase by Rs 14,100 crore
(0.09% of GDP) post 7th PC. As per the report the full
impact of the pay hike would be felt in FY18, when bigticket
items get a fillip. For instance, real estate off-take
will kick-off with lag effect. As far as the auto sector is
concerned, government employees and pensioners
accounted for 10-15% of the 2.78 million passenger
vehicles sold in India during FY16 and pay hike can bring
more buyers, resulting in higher demand for passenger
vehicles. The pay commission will put extra money in the
hands of a large section of Indian consumers, thus spurring
the demand for discretionary and aspirational products
which could positively impact consumer durables sector.
Rising demand for consumer durable products, cars and
housing would drive the retail lending growth, thus could
have affirmative impact on banks and NBFCs.
% of GDP
6th PC
7th PC
Source: Industry report
Rural demand to drive discretionary spending on the
backdrop of good monsoon
Rural economy had been depressed in last two years as
two consecutive years of drought have taken a toll on rural
household incomes. But an ‘above normal’ monsoon, as
predicted by India Meteorological Department (IMD), could
boost rural demand which in turn, could have a positive
impact on overall economy. A report by Goldman Sachs
stated that if the rural economy grows by one percentage
point, it could potentially boost overall gross domestic
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