Pay Commission’s proposals positive for consumption: Lehman Brothers
Lehman Brothers believes the Sixth Pay Commission’s recommendations will be negative for India’s fiscal position but could be positive for consumption.
By INDIATIMES NEWS NETWORK |
MUMBAI: Lehman Brothers believes the Sixth Pay Commission���s recommendations will be negative for India���s fiscal position but could be positive for consumption.
The Pay Commission, which reviews remuneration of central government employees, last week recommended 28 per cent hike in basic salaries and pensions (to be implemented retrospectively from Jan 1, 2006), and the near doubling of most allowances.
The government now has to decide whether to accept the recommendations. In 1997, the Fifth Pay Commission recommended 30 per cent hike which was implemented fully.
Back then, the impact on India���s economy was unambiguously negative: it triggered a major deterioration in fiscal finances with no obvious boost to consumption.
Assuming the commission���s recommendations are implemented fully, Lehman expects that the impact on the economy will not be as negative this time round.
Fiscal Finances
As was the case with the Fifth Pay Commission, the hikes in basic salary and pension will likely result in hikes of similar magnitude for the 6.5 million state government employees.
The Sixth Pay Commission estimates that the cost to the central government would be Rs 306 billion (0.6% of GDP). If the states implement similar hikes to the centre, Lehman estimates the combined government���s wage and pension bill could increase by Rs 480 billion (0.9% of GDP). The fiscal deficit could widen by 1.4 per cent of GDP.
In comparison, after the Fifth Commission���s recommendations were implemented, the general government���s fiscal deficit widened from 7.5 per cent of GDP to 10.7 per cent, and stayed around 10 per cent for the next four years.
The pay hike will work as a fiscal stimulus to the extent that it is consumed. However, the Fifth Pay Commission pay hikes had no obvious impact on consumption, as government workers largely opted to save the windfall.
A decade ago, interest rates on bank deposits were higher (11-12%) than they are today (8-9.5%), and there was much less choice of alternative financial investments.
Lehman believes this time round, a larger share of the windfall gain will be spent rather than saved, and the share that is saved will be allocated more broadly than before, including into the equity and real estate markets.
The Pay Commission, which reviews remuneration of central government employees, last week recommended 28 per cent hike in basic salaries and pensions (to be implemented retrospectively from Jan 1, 2006), and the near doubling of most allowances.
The government now has to decide whether to accept the recommendations. In 1997, the Fifth Pay Commission recommended 30 per cent hike which was implemented fully.
Back then, the impact on India���s economy was unambiguously negative: it triggered a major deterioration in fiscal finances with no obvious boost to consumption.
Assuming the commission���s recommendations are implemented fully, Lehman expects that the impact on the economy will not be as negative this time round.
Fiscal Finances
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As was the case with the Fifth Pay Commission, the hikes in basic salary and pension will likely result in hikes of similar magnitude for the 6.5 million state government employees.
The Sixth Pay Commission estimates that the cost to the central government would be Rs 306 billion (0.6% of GDP). If the states implement similar hikes to the centre, Lehman estimates the combined government���s wage and pension bill could increase by Rs 480 billion (0.9% of GDP). The fiscal deficit could widen by 1.4 per cent of GDP.
In comparison, after the Fifth Commission���s recommendations were implemented, the general government���s fiscal deficit widened from 7.5 per cent of GDP to 10.7 per cent, and stayed around 10 per cent for the next four years.
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This time, Lehman is more optimistic on two counts. First, India has a better starting position, with a fiscal deficit of 5.4 per cent of GDP. And second, with much higher GDP growth and lower government bond yields, revenue buoyancy and lower debt-servicing costs should reduce the risk of multi-year fiscal slippage.ADVERTISEMENT
Consumption Versus SavingsThe pay hike will work as a fiscal stimulus to the extent that it is consumed. However, the Fifth Pay Commission pay hikes had no obvious impact on consumption, as government workers largely opted to save the windfall.
A decade ago, interest rates on bank deposits were higher (11-12%) than they are today (8-9.5%), and there was much less choice of alternative financial investments.
Lehman believes this time round, a larger share of the windfall gain will be spent rather than saved, and the share that is saved will be allocated more broadly than before, including into the equity and real estate markets.
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