{LONGTERMINVESTORS} Fwd: India: Cabinet approves 7th Pay Panel recommendations

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From: <research@icicibank.com>
Date: Wed, Jun 29, 2016 at 9:06 PM
Subject: India: Cabinet approves 7th Pay Panel recommendations
To: stockdesai@gmail.com

India: The Cabinet, today, approved the recommendations of the Expert Committee on 7th Pay Commission (7PC) on hiking pay and pensions. However, the recommended hike in allowances has not been approved yet. The total financial impact of 7PC has been pegged at INR 849 bn currently. Of this ~71% will be borne by the General Government budget while remaining will be borne by the Railway Budget. Given that allowances have not been approved, the impact on inflation will be limited in the near term. There is likely to be some second round impact on inflation on account of likely boost in consumption demand. Cabinet gives nod to 7PC recommendations The Cabinet today approved the recommendations of the Expert Committee on 7th Pay Commission. The recommendations will result in 23.6% increase in total wage bill and pension of the Central Government employees. Total financial impact of 7PC (including allowances) in FY2017 had been estimated at INR 1021 bn. However, given that the approval is only to pay and pensions for now, the current government outgo amounts to ~INR 849 bn. Key highlights are as follows: Allowance hike not yet approved: The Cabinet has approved the recommendations on hike in pay and pension, amounting to 16% and 23.6% respectively. The hike in allowances (including ~139% hike in HRA) hasn't been approved, leading to a government saving of INR 293 bn. Current allowances will be continued to be paid. Finance Minister highlighted that 2-3 groups will be appointed on pay allowances hike. 7PC to be implemented retrospectively from Jan 2016: Arrears with effect from Jan 2016, amounting to INR 121.3 bn, will be paid within this fiscal. However, the payment will be done in tranches. Minimum pay increased from INR 7000 per month to INR 18000 per month Gratuity to be hiked from INR 10 lakhs to INR 20 lakhs (For details see appendix) Impact of 7PC on fiscal to be watched The total financial impact of 7PC has been pegged at INR 849 bn currently. Of this INR 606.1 bn (71%) will be borne by the General Government budget while INR 243.2 bn (29%) will be borne by the Railway Budget in this fiscal. In FY2017, the Government aims to reduce deficit by 0.4% of GDP to 3.5% of GDP.   Cabinet approves 7PC recommendations on pay and pensions; allowances not approved yet Source: 7th Pay Commission documents, ICICI Bank Research Inflation impact to be limited The HRA increase of ~139% suggested by the 7th Pay Panel had fuelled inflation concerns and were expected to increase the headline inflation print by ~40 bps. However, given that allowances have not been approved, the impact on inflation will be limited in the near term. CPI inflation has risen in recent months on the back of sharp uptick in vegetables and sugar prices. With monsoon likely to be above normal, some relief in these components and muted 7PC impact will be a key positive. There is likely to be some second round impact on inflation on account of a rise in money supply and increase in purchasing power of Government employees, which will boost consumption demand. However, given that there is still some slack in the economy, demand pull pressures on inflation may not be substantial in the near term. Subsequently, we maintain that our call of a further 25 bps rate cut this fiscal cannot be ruled out. However, any such policy move would be strictly contingent on data. Further, in this regard, appointment of the next RBI Governor and setting up of the Monetary Policy Committee (MPC) will be important.  Inflation impact to be limited in the near term given that HRA hike hasn't been approved Source: CEIC, ICICI Bank Research Consumption demand to benefit from pay panel awards Final consumption demand has remained fairly robust over the last fiscal year and averaged 7.4% YoY despite two consecutive years of drought, which has adversely affected rural incomes. However, the stress has been visible in high frequency indicators such as growth in consumer non-durables which is in deep negative territory. We believe, this edition of the pay panel will favourably support private consumption demand and will serve as a stimulus of sorts. This will be further buoyed by expectation of normal rains this year which will support rural incomes. Given that private consumption accounts for ~60% of GDP, growth prospects are likely to receive support going ahead. Regards, ICICI Bank Contact: Niharika Tripathi (+91-22) 2653-1414 (extn: 6943) niharika.tripathi@icicibank.com Kamalika Das (+91-22) 2653-1414 (extn: 6280) kamalika.das @icicibank.com ​

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CA. Rajesh Desai

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