E
CO
S
COPE
The Economy Observer
16 November 2015
USD20b-30b Pay Commission not to dent fisc
Fillip to select discretionary / savings products and cement
Pay Commission
Seventh Pay Commission impact would be
0.9-1.3% of GDP, inclusive of center and
states – that is, USD20b-30b
Bill lower than preceding Commission, as
(i) no arrears, (ii) proposed flatter pay, (iii)
lower inflation, and (iv) lesser political
compulsion
Fiscal boost limited to 20% of PFCE this
time – nearly half of last time. See benefit
for Autos and White Goods (selectively);
neutral for FMCG
Big boost for savings-related products like
housing, cement and bank deposits
Fiscal health unaffected, as salaries and
pension payments comprise only 12-15%
of the center’s revenue expenditure
We estimate the impact of the Seventh Pay Commission to be around
0.9% of GDP (1.3% including pension) in FY17 and FY18 for the center
and the states together. This translates to around USD20b (only
salaries) each of the two years and USD30b (including pension).
Reasons for lower outgo this time: (i) proposed flatter salary structure,
(ii) nearly no arrear payment, (iii) lower structural and cyclical inflation,
and (iv) lesser political compulsions.
The overall fiscal booster is limited to 20% of incremental domestic
private consumption during FY17 and FY18 in contrast with 57% and
22% during FY09 and FY10, respectively as certain components viz.,
higher subsidy, debt waiver, NREGA upscaling, etc. are absent.
In the past, Pay Commissions have boosted durables consumption
(including Autos, Tyres, and White Goods) but were neutral to FMCG.
Higher allocation is likely for savings products including housing and
time deposits (for future contingencies and ceremonies). Allocation to equity market is usually low, but rises sharply
when the capital market performs well.
Pay Commission is unlikely to dent fiscal health, which is more of a function of the government’s fiscal stance. Pay
Commission awards comprise only 12-15% of the central government’s total revenue expenditure. The impact was well-
absorbed during the Fourth and Fifth Commissions, when deficit went lower. However, during the Sixth Commission,
fiscal norms were relaxed to effect a post crisis stimulus, which included debt waiver and NREGA upscaling.
I. Estimate Pay Commission impact at a modest USD30b for FY17 and FY18
Seventh Pay Commission to cost center and states ~USD30b:
We have
calculated the overall financial impact of the implementation of the Seventh Pay
Commission at around 0.9% of GDP (for salary only) and 1.3% of GDP (including
pension) during the two years FY17 and FY18. This would amount to an
expenditure of ~INR2t (USD30b) each year. This is lower than the 1-1.6% of GDP
(around USD20b each year) impact during the Sixth Pay Commission.
FY09
FY10
229
232
FY17
374
177
FY18
374
212
Exhibit 1: The extent of fiscal stimulus is expected to be much less than previous Pay
Commission due to post crisis fiscal response (increase over previous year in INR b)
I. Centre
Total emoluments
Pension
II. States
Salaries and wages
Pension
III. Total Pay Commission (Salary)
(USD b)
IV. Total Pay Commission (Salary + Pension)
(USD b)
V. (III as % of GDP)
VI. (IV as % of GDP)
278
87
289
94
566
(12)
747
(16)
1.0
1.3
418
1044
1253
178
309
356
646
1,418
1,627
(14)
(21)
(24)
1,056
1,904
2,195
(22)
(29)
(33)
1.0
0.9
0.9
1.6
1.2
1.3
Source: Government, RBI, MOSL
Dipankar Mitra
(Dipankar.Mitra@MotilalOswal.com); +91 22 3982 5405
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

Seventh Pay Commission awards to be lower:
For several reasons the total
rewards for Pay Commission is expected to be lower in relative dimensions as
highlighted below:
i)
The Proposed flatter pay structure:
The indication so far is that the Seventh
Pay Commission would have a flatter structure, reducing the pay ratio
(between lowest and highest paid) to 1:9 from 1:12. While the growth in
minimum pay may be closer to the historical average of 3x, the overall
financial impact is unlikely to grow proportionately.
Exhibit 2: Minimum basic salary has grown 3x on an average in every Pay Commission
(INR b)
Minimum basic salary
The 3 times jump in minimum
pay expected in 7th Pay
Commission is due to a flatter
pay structure proposed (Pay
ratio at 1:9 from 1:12)
6,660
35
1st (1946)
80
2nd (1959)
185
3rd (1973)
750
4th (1986)
2,550
5th (1996)
6th (2006)
7th (2016)
21,200
Source: Government, RBI, MOSL
Exhibit 3: Financial impact as measured by Pay Commission is unlikely to grow
proportionately this time (INR b)
Financial impact (INR m)
800
Thus the payout this
time may grow only
around 2.6 times
306
170
0
1st (1946)
2nd (1959)
1
3rd (1973)
13
4th (1986)
5th (1996)
6th (2006)
7th (2016)
Source: Government, RBI, MOSL
ii)
Nearly no arrear this time:
Due to the timely implementation of the Pay
Commission this time, there would be nearly no arrear this time. This
sharply contrasts with more than two years of arrear payment during sixth
Pay Commission spread over FY09 and FY10.
16 November 2015
2

Exhibit 4: Financial impact as measured by Pay Commission is unlikely to grow
proportionately this time (INR b)
Increase in total salary and pension of central and state government employees (INR b)
7th Pay
Commission
Arrears
Current
6th Pay
104%
Commission
47%
195%
555
257
285
370
543
63
815
1,361
684
745
1,178
932
1,904
2,195
15%
Source: Government, RBI, MOSL
iii)
Lower inflation:
Much lower inflation this time and the prospect of lower
structural and cyclical inflation weakens the case for sharper increase.
Exhibit 5: Compensation for inflation would be much lower this time
CPI inflation (YoY%)
14
11
9
6 7
9 9
7
10
7
10 10
10
7
4 4
5
4 4
4 4
7 6
13
9
12
10
8
6
5 4 4
10 10
Source: Government, RBI, MOSL
iv) Lesser political compulsion: While the election calendar is heavy, Pay
Commission is unlikely to emerge as election issue.
16 November 2015
3

Exhibit 6: State election schedule unlikely to impact Pay Commission award
S.
NO.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
STATE
Tamil Nadu
West Bengal
Kerala
Puducherry
Assam
Manipur
Punjab
Uttarakhand
Uttar Pradesh
Meghalaya
Nagaland
Tripura
Karnataka
Mizoram
Madhya Pradesh
Rajasthan
Sikkim
Arunachal Pd.
Telangana
Odisha
Andhra Pradesh
Maharashtra
Nct Delhi
FROM
23.05.2011
30.05.2011
01.06.2011
03.06.2011
06.06.2011
19.03.2012
19.03.2012
27.03.2012
28.05.2012
07.03.2013
14.03.2013
15.03.2013
29.05.2013
16.12.2013
08.01.2014
21.01.2014
28.05.2014
02.06.2014
09.06.2014
12.06.2014
19.06.2014
10.11.2014
23.02.2015
TO
22.05.2016
29.05.2016
31.05.2016
02.06.2016
05.06.2016
18.03.2017
18.03.2017
26.03.2017
27.05.2017
06.03.2018
13.03.2018
14.03.2018
28.05.2018
15.12.2018
07.01.2019
20.01.2019
27.05.2019
01.06.2019
08.06.2019
11.06.2019
18.06.2019
09.11.2019
22.02.2020
LOKSABHA
SEAT
39
42
20
1
14
2
13
5
80
2
1
2
28
1
29
25
1
2
17
21
25
48
7
ASSEMBLY RAJYA SABHA
SEAT
SEAT
234
294
140
30
126
60
117
70
403
60
60
60
224
40
230
200
32
60
119
147
175
288
70
18
16
9
1
7
1
7
3
31
1
1
1
12
1
11
10
1
1
7
10
11
19
3
Source: Election Commission, MOSL
16 November 2015
4

II. Impact on consumption: Durables could benefit selectively
Much smaller fiscal boost to consumption this time:
Apart from Pay
Commission, which itself was proportionately much higher last time there were
other elements of fiscal booster last time as part of a post-crisis fiscal response.
These include i) much higher subsidy payment, ii) debt waiver scheme and iii) a
sharp upscaling of NREGA to cover all districts from 200 districts initially. Taken
together these fiscal boosters comprised nearly 57% of incremental domestic
private consumption in FY09 and around 22% during FY10. However, this time
the fiscal boost is expected not to exceed 20% in either of the years of
implementation.
Selective benefit for Durables, not a game changer for FMCG:
Past experience
suggests that the Consumer Durables industry benefitted more from the Pay
Commission award either in terms of a fillip to growth (Autos) or in holding up
growth (White Goods). The intermediate players (Tyres for instance) were
beneficiaries. However, no major uptick is seen for FMCG players, as additional
income may not provide much boost to basic consumption.
Exhibit 7: As a few key elements of fiscal boost are either scaled down or absent, the
impact on consumption this time would be much less
1. Subsidy enhancement
2. Debt waiver scheme
3. NREGA upscaling
4 Pay Commission (a to d)
a) Centre + States
b) Railways
c) CPSUs
d) SPSUs
5. Total fiscal boost
6. Incremental domestic PFCE
7. Fiscal boost (as % of incremental domestic
PFCE)
8. Pay Commission (as % of incremental
domestic PFCE)
FY09
588
717
114
907
566
93
124
124
2,326
4,076
57
22
FY10
116
0
106
786
646
77
31
31
1,009
4,635
22
FY17
111
0
0
1,912
1,418
122
186
186
2,024
9,964
20
FY18
109
0
0
2,072
1,627
110
168
168
2,181
11,048
20
17
19
19
Source: Government, RBI, MOSL
Exhibit 8: As a singular event, Pay Commission (even including all types of government
agencies and PSUs) would barely touch 3.5% of around 500m employed people in India
Approximate no. of employees (mn)
10
3.5
1.5
1.5
1.5
Source: Government, Media, MOSL
16 November 2015
5

Exhibit 9: Evidence of any consumption pick-up is weak, but
Durables did better
IIP
Consumer non- durables
40
20
0
-20
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Source: CSO, MOSL
Consumer durables
Exhibit 10: White Goods demand was perhaps supported
somewhat by Pay Commission
Refrigerators
Colour TV sets
30
15
0
-15
-30
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15
Source: CMIE, MOSL
0
-50
Washing machines
Air conditioner (RHS)
100
50
Exhibit 11: Passenger Car / Two-wheeler sales recovered
after 6th Pay Commission, but the pattern is not consistent
Domestic Sales of Passenger Cars (YoY%)
Domestic Sales of Two Wheelers (YoY%)
50
30
10
-10
5th
6th
Exhibit 12: Tyre production largely revived during the period
of previous Pay Commission awards
30
20
10
0
-10
-20
5th
6th
Production of tyres (YoY%)
Source: CMIE, MOSL
Source: CMIE, MOSL
Exhibit 13: Additional stimulus of debt waiver and NREGA
helped in scaling up rural expenditure
FMCG Urban (YoY%)
18
11
19
17
17
FMCG Rural (YoY%)
16
13
15
9
11
6
Exhibit 14: However, the consumption benefit was not
uniform for FMCG companies and urban sales trailed
HUL Volume growth (YoY %)
13
9.3
6.8
3.3
4.8
4
4.8
6.5
10
3
1
-8
14
13
15
FY09
Source: Companies, MOSL
FY10
FY11
FY12
FY13
FY14
FY15 1HFY16
Source: Company, MOSL
III. Impact on saving: People save and take cautious bets
As much as half of additional income may go into housing and savings
products:
Many consumer surveys have established that people with regular
flow of income are able to plan better for their savings and deferred
consumption. The same is true for government servants, who having already
satisfied their basic consumption needs, would spend a large part of their
additional income on various savings products, including housing. Demand for
housing could come from both relatively aged government servants (planning
6
16 November 2015

for post-retirement settlement) as well as the younger lot (average age of house
ownership has fallen, with easy availability of loans, also facilitated by the
government itself as employee loans in many cases). Another aspect is rising
cost of various services including education, health, entertainment and travel,
all of which are heavily consumed by government servants. Based on various
surveys and our own estimation, we have arrived at the following distribution of
the Pay Commission awards during FY17 and FY18.
Exhibit 15: How the Pay Commission awards may be spent and saved - an illustration
Items
Total income
Saving/investment
Housing (EMI + Rent)/Land
Cash
Deposits
Shares and debentures
Gold
Goods consumption
Clothing
Durables
Services
Education
Health
Transport
Contingencies/Ceremonies
Travel/Entertainment
% of total Income FY17 Spend (USDb) FY18 Spend (USDb)
100.0
13
11
50.2
7
6
29.4
4
3
3.0
0
0
16.2
2
2
1.0
0.1
0.1
0.6
0.1
0.1
19.1
2
2
3.8
0
0
15.3
2
2
30.8
4
4
5.2
1
1
4.7
1
1
6.6
1
1
5.1
1
1
9.2
1
1
Source: NCAER, CSO, RBI, MOSL
Exhibit 16: Cement production revives, supported by post Pay Commission demand
Cement production (YoY%)
12.4
10.5
9.1
8.1
7.3
4.5
3.1
6.7
7.7
5.6
Source: RBI, BSE, MOSL
Rise in financial savings:
A more definite evidence of past pattern is a rise in
financial savings coinciding with Pay Commission award. Deposits, especially
time deposits, are the default destination, as bulk of the financial savings is held
for future contingencies or planned ceremonies. Comparatively, investment in
capital market is small, but rises sharply with improving market performance.
16 November 2015
7

Exhibit 17: People have put more money in deposits during Pay Commission times
50
36
22
8
-6
Source: RBI, MOSL
5th
6th
Deposits (net of loans)
Exhibit 18: Allocation to time deposits usually increases during Pay Commission periods
Demand deposits (YoY%)
45
30
15
0
-15
5th
6th
Time deposits (YoY%)
Source: RBI, MOSL
Exhibit 19: Cautious bets on equity when the market performs
Investment in capital market
24
16
8
0
-8
5th
6th
Sensex return
100
50
0
-50
-100
Source: RBI, BSE, MOSL
16 November 2015
8

IV. Pay Commission need not dent fiscal health
Only a two-year bump:
Pay Commissions are seen to cause a two-year bump in
overall salary and pension payments by the central and state governments. In
the third year, usually even the absolute payment declines, as the burden of
accumulated arrears declines. This is however, not seen to cause any uptick in
the center’s overall revenue expenditure – salary and pension comprise only 12-
15% of the government’s revenue expenditure.
Overall fiscal stance matters:
Pay Commission awards have happened during
periods of both fiscal corrections as well as laxity. Fiscal correction was achieved
during the Fourth and Fifth Commissions, while fiscal slippage was allowed
during the Sixth Commission as part of the post crisis stimulus package, which
included big giveaways in the form of debt waiver scheme (~INR700b in FY09)
and scaling up of MGNREGA (another INR100b each year from FY09).
Exhibit 20: Pay Commission awards result in a two-year bump in the total salary payout for the government
18000
13500
9000
4500
0
FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Source: Government, RBI, MOSL
Salaries - Centre
Pension - Centre
Salaries - States
Pension - States
In year 3 of post Pay
Commission reward,
there is a usually a decline
in total pay as arrears are
Exhibit 21: Pay Commissions do not bump up government’s revenue expenditure, as salaries constitute only 12-15% of it
35
30
25
20
15
10
5
0
4th
5th
6th
Revenue expenditure of central government (YoY%)
Source: Government, RBI, MOSL
16 November 2015
9

Exhibit 22: For the Center, while the 4th and 5th Pay Commissions were awarded during
fiscal compression, the 6th was during expansion
10
8
6
4
2
0
4th
5th
6th
Fiscal deficit - Centre
Revenue deficit - Centre
Source: RBI, BSE, MOSL
Exhibit 23: For the states, revenue balance was near surplus during the 4th and 6th Pay
Commissions, but the 5th was awarded during fiscal expansion
Fiscal deficit - States
5
4
3
2
1
0
-1
-2
4th
5th
6th
Revenue deficit - States
Source: RBI, BSE, MOSL
16 November 2015
10

REPORT GALLERY
ECOSCOPE

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