Notification of 7th pay commission is already announced. This is a well expected positive move, this will help achieve GDP growth target quicker.
The auto, consumer durables and FMCG sector would see much higher demand. The small concern could be that this may push inflation a bit higher.
Pros
1) Boost in demand
When over one crore government employees and pensioners will receive over a 23% hike in salaries and pensions, it will boost the overall demand scenario in the economy, leading to more expenditure, thus benefitting the country’s GDP.
2) Consumption led stocks to gain
All consumption related stocks from the FMCG, real estate and auto sector are having a party on Dalal Street with them logging significant gains in trade.
3) A savior amid global market turmoil
The seventh pay commission has rendered a much-needed relief to the market, concerned over a spate of issues from Britain’s verdict to leave the European Union, the prospects of US Federal raising interest rates, to concerns over FII outflows due to RBI Chief Raghuram Rajan’s disinterest for the second term.
Cons
1) Fiscal deficit may widen
While the Budget for 2016-17 did not provide an explicit provision for implementation of the 7th Pay Commission, the government had said the once-in-a-decade pay hike for government employees has been built in as interim allocation for different ministries.
The government’s kitty is likely to have an additional burden of Rs 1.02 lakh crore, or nearly 0.7 per cent of GDP, which may make it troublesome for the government to meet its fiscal deficit target for the current financial year.
2) Inflation risk
RBI has repeatedly commented that it sees an upside risk to Consumer Price Inflation index (CPI) inflation on the back of 7th pay commission. Now that the reward is out, all eyes will stare at RBI as to how much spike it estimates on the CPI in its monetary policy review scheduled to be out on August 09.
