Pay hike: Demand to get a boost

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Bikky Khosla | 05 Jul, 2016
The Cabinet last week broadly accepted the Seventh Central Pay Commission recommendations, a move that will lead to 16 percent pay hike and 24 percent increase in pension, benefiting 47 lakh serving central government employees and 53 lakh pensioners. The hike is close to Rs 85,000 crore, which, needless to say, is a substantial amount of money. The Pay Commission report was submitted in November 2015, and it is commendable that the government, unlike previous times, has acted on it fast. Most importantly, the decision has come at a crucial time amid global uncertainty arising out of Brexit.

There is little doubt that this big pay bonanza will give a massive push to consumer demand, well ahead of the year-end festival season. With more disposable income in hand, middle- class people are likely to loosen the purse strings and this, in turn, will result in higher demand. It is expected that sectors like automobiles, white goods and FMCG will benefit in a big way. In addition, I think the realty sector, which has been suffering the brunt of low demand for quite some time now, will benefit from the decision. Also, it is very likely that soon state governments, following the footsteps of the Centre, will implement pay hikes for their employees, which I think can provide a far bigger boost to the economy.

It is also great to see some green shoots coming out in the rural economy of late. According to some economy observers, consumption in rural India is going up slowly but steadily in anticipation of a better monsoon. Rural demand has remained dull due to two consecutive years of drought, but with the Meteorological Department recently forecasting better than normal Southwest Monsoon for the year, consumers are now no more holding their purchases. Rise in tractor sales in the first five months of this year supports this view. It is also expected that higher Budget allocation for schemes like MGNREGA will play a key role in pushing rural demand in the coming months.

Meanwhile, the Nikkei India Manufacturing PMI rose to a three-year high of 51.7 in June and it is fairly clear now that the weakness in the sector in the preceding two months was not due to any increasingly deepening crisis, but mainly the result of some transitory factors, including elections in five states. During the month, both production and new orders witnessed growth. Also, both foreign and domestic orders rose, but it was the latter that played the key role. In addition, the data shows decrease in purchasing cost inflation, which, it is expected, may prompt the RBI to cut rates.

I invite your opinions.