What will be the positive effects of 7th pay commission on the other sector?

Date : 18.7.2016

What will be the positive effects of 7th pay commission on the other sector?

The 7th Central Pay Commission (7CPC) is the precursor of the things to come. The pay commission recommends salaries for the Central government employees, but it has wide ramification in India. It impacts almost every sector in India.

• Following the 7CPC report, the state governments improves the salaries of their employees in the same proportion.
• Following the improvement of central and state government salaries, the public sectors, the universities and educational institutions also improve the salaries of their employees.
• Since most public sectors are in competition with private sectors, the salaries of private sector employees also go up soon after.
• When the salaries of employees of all classes go up, there is increase in demands of all type of goods including cars, TV etc. This improves their financials and improves employment opportunities. It also improves imports of goods to cater to the demands.
• When people have more money, they also spend more on services, which improves demand in service sector thus creating more employment.
• When income of employees is increased, the Income Tax collection improves.
• When the demand of goods and services improves, the collection of Central Excise, Customs and Service Tax also improves.

In Tier 3, Tier 4 towns where government employees are 50-60 per cent of the middle class, it is very likely that real estate and auto markets will take off again

How the 7th Pay Commission can fire up the Indian economy

1) A 15 per cent salary increase would push up the central government's salary bill by Rs 25,000 crore (or $4 billion), which is 0.2 per cent of India's GDP, says Indranil Sen Gupta of Bank of America Merrill Lynch. This will help in a consumption-driven recovery in the domestic economy, he added.

2) According to Neelkanth Mishra of Credit Suisse, nearly one-third of India's middle class is employed by the government and as the 7th Pay Commission comes through, there will be an improvement in discretionary spending. "In Tier 3, Tier 4 towns where government employees are 50-60 per cent of the middle class, it is very likely that real estate markets will take off again," he said.

3) Bank of America Merrill Lynch also expects the 7th Pay Commission to double subsidized loans for cars to Rs 3.60 lakh and housing loans to Rs 15 lakh. This will push up demand for autos and housing.

4) According to Religare, "The most important factor is economic activity itself which is gaining pace and, together with greater employment generation and policy reform, the 7th Pay Commission salary hike may help India enter a larger virtuous cycle."

Large-scale salary hikes, however, are also expected to stoke inflation and fiscal pressures. "Clearly if you see a third or 35 per cent of your middle class getting a 40 per cent or 30 per cent jump in compensation in one shot, the fears of inflation will rise," Mr Mishra warned. He added that expectations of rate cuts can get pushed out and some possible fiscal pressures can emerge.