7th Pay comission- Large government capital getting polarised to 10 mn people (0.83% of the population)
The 7th Pay commission recommends a 24% hike in salary levels of central government employees which implies an incremental delta in salaries of approximately Rs 1022 bn (0.65% of the GDP).
At the onset the above recommendations will have a positive impact on consumer demand and spending. However, the quantum of stimulation provided will depend on the acceptance of recommendations and implementation of the same by the government who will take cognizance of fiscal and inflationary impact of this recommendation. The government may decide to 1) dilute the quantum of hike or 2) to stagger the implementation of the 7th pay commission recommendations to reduce the fiscal impact of the same. Public sector entities and State government also follow the central government Pay scale revision with a lag which will provide impetus and support to the consumer trend incrementally. However the implementation by states is discretionary and quite staggered too.
The reality is that India flows today are predicated on the “India macro story” of fiscal consolidation and benign inflation pending corporate sector’s earnings recovery and the government of India is capital constrainted. Thus the 7th CPC If implemented in its entirety would have the following impact-
1) Dilute the macro construct of fiscal consolidation and inflationary expectations
2) Divert Capital expenditure towards Revenue expenditure
3) Stimulate consumption demand thereby improving corporate sector’s (consumer companies) revenue growth, profitability and ROE.
The government will try to achieve a balance , however in the interim we continue to focus on studying the evolving shifts in government spending patterns and aligning portfolios accordingly.
Central Pay Commission – Demand impact and portfolio positioning
The CPC touches around 10 mn people (0.83% of the Indian Population) mostly residing in metros, Tier –I and Tier –II cities who have a more discretionary consumption basket.
6th CPC implementation had seen robust volume growth across consumer categories. The spending was broad-based across consumer staples, consumer discretionary, autos, valuables and physical assets.
7th CPC if implemented should see the following Demand trends
A) Premiumization across categories
B) Consumer discretionary spends
– Media and Entertainment
– Leisure Travel
– Consumer durables
C) Retail Banking and Financial services
Our Portfolios are favourably positioned to capture the above evolving trend in consumption with exposure to media, 4 wheelers, consumer durables, consumer discretionary and private sector financials.
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