Pros and cons of Seventh Pay Commission for market and economy

The much-awaited Seventh Pay Commission has finally seen the light of the day. The cabinet on Wednesday approved implementation of the 7th Pay Panel, which had recommended an overall hike of 23.5 per cent for the government employees and pensioners.

The hike in salaries will come into effect from January 01, 2016 along with arrears.

While the move will do well to the government employees, thus economy at large, a couple of concerns also loom over the award of such hefty pay panel benefits.

"Just ahead of Monsoon, the 7th Pay commission will set the snowball impact in the economy. This is a well expected positive move, this will help achieve GDP growth target quicker," said Motilal Oswal,CMD,Motilal Oswal Financial Services.

"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," the expert added.

We have compiled three advantages and two disadvantages of the Seventh Pay Commission for the market and economy:

Pros

1) Boost in demand

When over one crore government employees and pensioners will receive over a 23-per cent hike in salaries and pensions, it will boost the overall demand scenario in the economy, leading to more expenditure, thus benefitting the country's gross domestic product (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 today.

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

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.

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.