Domestic consumption to rise by Rs 45,000 cr on govt pay hike

The revised salaries of central government employees are likely to be paid from July 1, 2016.

The government's decision to implement pay hike for its 1 crore employees and pensioners will boost domestic consumption by Rs 45,110 crore as also push up household savings, India Ratings and Research said on Wednesday.

According to Ind-Ra, the gross impact of the increased pay out on the government exchequer is likely to be Rs 94,775 crore (0.63 per cent of GDP).

"The central government will receive income tax on this pay out and collect excise duty on consumption, after sharing the increase in income tax and excise duty with states. Thus the net impact on the central government finances is estimated to be Rs 80,641 crore (0.54 per cent of GDP)," Ind-Ra said.

The Cabinet, headed by Prime Minister Narendra Modi, cleared the recommendations of the 7th Pay Commission according to which the overall hike in salary and allowance of central government employees and pensioners comes to 23.5 per cent.

 This is expected to boost consumption in the economy by Rs 45,110 crore (0.30 per cent of GDP) and increase savings by Rs 30,710 crore (0.20 per cent of GDP), Ind-Ra said.

"The revised salaries of central government employees are likely to be paid from July 1, 2016. While the employees will get salary arrears from January 1, 2016, allowances will be paid only from July 1, 2016," it said.

The impact of the pay hike is expected to be less severe on state finances than expected earlier due to a lower arrear pay out, it added.

It said there is not any immediate threat to inflation due to the pay hike.

"Though consumer price inflation may inch up somewhat due to higher prices of services, impact on wholesale price index 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," Ind-Ra said.