'7th Pay Comm to be demand booster; but lag on fiscal path'

The Seventh Pay Commission award will be a demand booster to the economy, but it may pose a serious challenge to the government's fiscal consolidation path, ratings firm Ind-Ra said today.

"Ind-Ra's estimate shows that the demand boost to the economy as a result of the revision in the salaries/pensions will be at least four times the 7CPC's award.
However, after factoring in the share of the central government in increased tax collection (direct and indirect), the net impact on the exchequer will be lower at 0.68 per cent of GDP.

"Yet at a time when the government is pursuing the path of fiscal consolidation, this will pose a serious challenge for the government in terms of not deviating from the fiscal deficit targets as announced in the FY16 budget," Ind-Ra said in a release.

The Seventh Central Pay Commission (CPC) award is likely to cost the central government Rs 1.021 trillion in 2016-17, a 23.55 per cent increase from 2015-16, it added.

The Pay Commission has proposed an increase of 23.55 per cent in the pay packet (salary and allowances) of central government employees and pensioners, which will become effective from 1 January 2016. The payout is expected in 2016-17.

"Ind-Ra does not see any immediate threat to inflation due to the award of 7CPC. Though CPI inflation may inch up somewhat due to higher prices of services, impact on WPI is likely to be muted due to the counter balance provided by the deflation in commodity prices and the availability of excess capacity in several manufacturing sectors."

A rise in demand is likely to not only increase capacity utilisation but may also help revive the investment cycle earlier than expected, added the ratings firm.