7th Pay Commission: Licence to splurge

Beneficiaries of the payout tell us how they plan to spend the money coming their way

With the festive season around the corner, the stock markets and consumer goods sector are upbeat about the expected payout from the 7th Central Pay Commission (CPC) recommendations. About Rs.1-lakh crore worth of money will land in the pockets of more than one crore Central government employees and pensioners this year — as salaries, allowances and pension benefits.

About two-thirds of that amount would have already kicked-in — as payment of eight-month arrears of salary — spelling cheer for consumer goods manufacturers. This year, the 7th CPC had recommended a pay hike of 23.5 per cent for Central government employees.

How are the beneficiaries of this bounty planning to spend it? Here’s a quick survey.

Loan repayment

“I just received about eight months of arrears along with my salary,” confirmed Kulwinder Singh, an employee with Prasar Bharati’s Doordarshan Television Network. The newly-revised salary is applicable from January 1 of this year. “The amount is not substantial in absolute terms. I will use the amount to make future payments relating to a recent land purchase,” says Singh. Overall, he is happy with the extent of the hike.

Kripasankari Srivatsa, working at the office of the Accountant General (A&E) of Tamil Nadu, has similar plans. “I had taken an education loan a few years ago to sponsor my daughter’s education abroad. I will pre-pay a part of this loan.”

The last time, Central government employees got a hike, things were different. The 6th CPC-recommended salaries — notified in 2008-09 but paid retrospectively from January 1, 2006 — was quite a big amount in real terms for the employees. “It was equivalent to 30 months of arrears and was quite a bounty,” recollects Asif Mirza (name changed), working with the Income Tax Department. Also, the extent of hike was higher than it has been this time, averaging 35 per cent. This time around, about Rs.70,000 on average would have been doled out to about one crore employees as arrears this month. Mirza plans to buy the long-coveted 42-inch LED TV while his colleagues have diverse plans — buying gold jewellery, electronic items or a four-wheeler.

Perking up demand

About 30 per cent of Central government employees earn less than Rs.30,000 a month, while another 45 per cent earn in the Rs.30,000-50,000 range and another 12 per cent between Rs.70,000 and Rs.1 lakh a month, according to reports.

The salary hike following the 7th CPC recommendations would lead to massive reshuffle in composition of Central government employees under various income brackets, according to a report from ICICI Securities. With the salary hike, there would be a 20 per cent reduction in the number of employees in the earning-less-than-Rs.30,000 bracket — in favour of those in the Rs. 30,000-50,000 bracket (6 per cent) and Rs.50,000-75,000 bracket (14 per cent).

Typically, as the income level rises, spending on essential items such as food plateaus, while that on discretionary items goes up. While such payments were made last time in 2008 following the 6th CPC recommendations, there was a pick-up in sales of personal transport like cars and jeeps, jewellery, travel and tourism. Additionally, consumer durables like washing machines, air-conditioners and refrigerators saw a boost in demand.

“During the last pay hike, the lumpsum amount was big enough to buy myself a car,” recollects Mirza. With the increment not being as big this time, it is likely that low-ticket items such as cooking and household appliances get the initial boost in demand.

Moreover, the age profile of the employees has a bearing on the extent of spending.

Take, for instance, Vikram Malhotra, a 75-year-old retired police officer, who feels he is in the last lap of life. “I don’t look forward to saving much and plan to replace my old car with a new one.” Another retiree from BARC plans to mostly save the bounty by investing in fixed deposits towards medical emergencies.

“Not counting chickens before they hatch,” he reasons. According to reports, almost half of the one crore beneficiaries of the 7th CPC are pensioners.

Also, among the working Central government employees, about 30 per cent are in the 52-60 age bracket.

And they are unlikely to be very liberal with their wallets unlike the youngsters.

“I am planning to move into a three-BHK rented flat with better amenities than the one I am currently staying in,” says Mani Subramanian (name changed), a Central government employee. Some of his colleagues are contemplating buying a flat in the suburbs, with improved income levels.

As income level increases, households typically tend to spend more on rent. Those who own flats already look to refurbish it. “I am planning to paint my house as well as change the flooring,” says Supriya Mule (name changed), another Central government employee. Housing and related sectors such as building materials (tiles, etc) are, therefore, expected to get a leg-up.

However, this time around, given the extent of payout, it’s more likely that the rental yield might go up first.

The current macro-economic situation is partly favourable and partly non-conducive. On the one hand, interest rates are lower.

This, in turn, could spur demand for buying consumer items on credit.

Prabhu Das, for instance, plans to buy an LG 450 litre fridge by making initial payments from the 7th Commission payouts and going for a loan to make the rest of the payments.

However, with consumer inflation remaining high, it’s likely that the consumer might curb spends to adjust to the uncertain price scenario. Not the least, the threat of the central bank increasing interest rates to control inflation could play spoilsport.

Moreover, it is likely that the spending would be made not at one go but over a period of time, say, 9-12 months.

And with the revisions of the State governments likely round the corner — state governments usually replicate the recommendations of central CPC with a lag — the Indian consumption story could get a good thrust.

Source: thehindu

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