7TH PAY COMMISSION – SOME SAY IT WILL BOOST THE MARKET

7th Pay Commission – Some Say It Will Boost The Market – Experts Say Its A Myth!

For salaried employees, no news can match the happiness that comes from the news of a pay hike. But it is not just employees who benefit from pay hikes. It is also good for companies, which sell products bought by people getting these hikes.

An increase in monthly salary helps employees spend on things, which they were earlier unable to purchase due to lack of funds. Now imagine the impact of such a pay rise for 1.8 crore central and state government employees. It is for this reason that many companies are waiting eagerly with high levels of optimism, for the recommendations of the 7th Pay Commission to come out and be implemented. The expectation is that sales will rise due to extra money coming in the hands of employees.

It is not that this optimism has no basis. If past trends around pay commissions are analyzed, it is easy to see that there are big spikes in sales of many products like cars, two-wheelers, electronics and even real estate. It is this trend, which is pushing companies to prepare for this oncoming surge in demand.

But many people believe that sales might not increase as much as it used to happen earlier. It is because this time, recommendations of pay commission are expected to be implemented quickly. This will lead to less or no lump sum amount being paid as arrears to the employees.

As Kotak Institutional Equities points out, the economic environment at the time – when the 6th Pay Commission report was implemented in 2008, but effective from January 2006 – was far less challenging than the current status and there were many other factors that contributed to the surge in consumer demand, none of which are present today.

Halving of excise duties – from 16% to 8% between February 2008 and 2009 – allowed auto firms to drop prices, and a 425 bps cut in the policy rate in a span of just seven months made money significantly cheaper. Both moves were part of a stimulus package meant to revive demand after the global financial meltdown and resulted in a fall in product prices.

Apart from that, the rural economy at that time was in far more robust shape than it is today with farm incomes rising sharply over FY05-13 driven by the MNREGA and big hikes in MSPs; the hike in MSPs for both seasons of FY09 was particularly steep given the elections were round the corner. As such, rural India was a lot more prosperous than now with real rural wages barely growing.

Moreover, consumer confidence was reasonably high as private sector investment, which rose steadily after 2004 and peaked in 2008 at 14% of GDP, had created a lot of jobs. Today, private sector investments are at 15-year lows and corporate cash flows are crimped with most companies highly leveraged. Given the far more difficult environment today, it would be unwise to expect an impact of similar magnitude on consumption demand from pay hikes following the 7th Pay Commission’s recommendations.

To be sure, the impact would also depend on the quantum of the hike – the last time around, there was a total increase of 120% between FY06 and FY11, translating into a compounded annual increase of 17%, including R44,000 crore of arrears. Even if the pay hikes are as generous, since there will be no great delay in implementation, there will be major piling up of arrears. Given that the overall environment will not be as conducive as it was at the time of the 6th Pay Commission, it is unlikely the 7th Pay Commission will pull consumer sentiment up enough to give the economy the boost it needs.