7th CPC Salary hike: Bank of America estimates the salary raise to be at 15%, Religare puts it at 28 to 30%. Credit Suisse expects a salary hike of 40%. - International Business Times Report

How Pay Commissions Play a Key Role in Boosting India's Growth

Pay Commissions, which are regularly constituted to review salaries of Central government employees, give a fillip to the Indian economy, according to analysts.

The sixth Pay Commission partly offset the after-effects of the 2008 Lehman crisis on India because of the 35% increase recommended. 

The implementation of the hike boosted two-wheeler and car sales and increased demand in the cement sector, according to global brokerage firm Bank of America Merrill Lynch.

Pay packages of government employees rose by an average of 35% as per the recommendations of 6th Pay Commission. They also received arrears of more than 30 months due to delay in the implementation.

"The arrears resulted in robust demand for consumer discretionary products that resulted in sustained stock performance over 3-5 years," Jai Shankar, chief India economist of Religare, told NDTV Profit.

Due to this co-relation between Pay Commissions and economic growth, many analysts are eagerly awaiting the 7th Pay Commission report.

The 7th Pay Commission was appointed in February last year by the outgoing Congress-led UPA government, is likely to submit its recommendations by August-end or latest by October. The recommendations are likely to be implemented by the Central government next year.

About 50 lakh central government employees (including 15 lakh defence personnel) and more than one crore state and local government employees will gain from the recommendations to be made by 7th Pay Commission, according to Religare. 

Besides, it will also result in an upward revision of pension for about 30 lakh retired Central government employees.

While there is no consensus on the amount of salary hike likely to be recommended by the 7th Pay Commission, analyst expects it to be in the range of 15 to 40%.

While Bank of America estimates the salary raise to be at 15%, Religare puts it at 28 to 30%. Credit Suisse expects a salary hike of 40%.

Economists see the 7th Pay Commission as improving the economic activity in the country by increasing consumption.

"The most important factor is economic activity itself which is gaining pace and, together with greater employment generation and policy reform, the 7th Pay Commission salary hike may help India enter a larger virtuous cycle," said Religare. 

"A 15 per cent salary increase would push up the central government's salary bill by Rs 25,000 crore (or $4 billion), which is 0.2 per cent of India's GDP. This will help in a consumption-driven recovery in the domestic economy," said Indranil Sen Gupta of Bank of America Merrill Lynch.