Indian economy to get booster shot as government salaries set to rise

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The Indian economy is set for a demand boost across a string of sectors, thanks to the recommendations of the 7th Pay Commission. The pay panel, which is set up every 10 years to revise salaries of government employees, is expected to benefit 47 lakh federal government workers and 52 lakh pensioners.

Pay revisions for employees in states, state-run companies, autonomous entities are expected to put more money in the hands of the vast consuming class. This augurs well for an economy which is in desperate need for a demand revival. The recommendations of the panel, which has awarded 23.5% increase in salaries and 24% hike in pensions, will be implemented by January next year.

Economists reckon the 7th Pay Commission recommendations will help in accelerating growth by deepening demand in sectors such as automobiles, real estate, gold and a host of others. It also has the potential to push demand in rural areas.

“True, by perking up household consumption demand, CPC revisions will facilitate faster improvement in capacity utilization in the fiscal 2017. And if supported by normal monsoons, which will lift the sagging rural demand, the private corporate investment cycle could materially lift towards the second half of fiscal 2017,” said a Crisil ratings agency report.

“With the states also implementing wage hikes by a one-two-year delay as in the past, the consumption demand will get another booster shot. Nothing comes free. There will be adverse fiscal and inflationary implications- but much lower than experienced when the Sixth Pay Commission was implemented,” the report said.

The government is expected to bear a burden of over Rs 1 lakh crore in 2016-17 due to the implementation of the commission’s recommendations. While this has raised fears of a pressure on the government’s move to repair public finances, the government has said it has enough headroom to meet the extra spending.

The economy is expected to grow by 7.5% in the current fiscal year. While there are signs of a turnaround, the patchy monsoon rains have raised doubts about the strength of the rural economy’s ability to drive demand. The rural economy is a significant contributor to growth and a good monsoon drives demand for everything from tractors to clothes and jewellery.

The reform initiatives unveiled by the government are also expected to add to the momentum and help sustain growth. But there are some areas which need urgent attention.

The industrial sector still remains sluggish private investment is yet to accelerate. The push to revive stalled projects should help unlock revival for the sector. Demand for steel and cement have remained tepid and there is a need to push infrastructure projects.

Agriculture also needs urgent attention. Some areas of the country are still struggling with the spectre of deficient monsoon rains. While the government has been quick to respond to the situation more needs to be done for a sustained revival of the crucial sector which is still remains a lifeline for the Asia’s third largest economy.

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