Reported by: banking|Updated: August 3, 2016
The union cabinet has in July 2016 approved most of the recommendations of report of the 7th Central Pay Commission. It has ratified a 16% hike in pay and 24% increase in pensions, to be effective from January 2016. Increase in pay outs is expected to provide an immediate boost to discretionary consumption as well as savings.
R.C. Lodha, Executive Director at Central Bank of India, says that the implementation of 7th Pay Commission recommendations will benefit around 4.7 million central government employees (including defence and railways) and 5.2 million pensioners. It will provide payout of Rs1 trillion approximately, which will increase the disposable income in the hands of employees, leading to spending on automobiles, consumer products, housing, etc. He expects the increase in the bank’s retail credit by Rs 35-40 billion. As regards inflation, it may go up by 1% and GDP growth will touch to 8%.
Customers having high disposable income tend to spend more on things to upgrade the status. Thus, there will be increase in the demand of premium products. The major industries likely to benefit from this is automobile (Maruti Suzuki, Hero Honda, Bajaj etc), and in respect of consumer goods it will be Godrej, Whirlpool, LG and other prominent brands. Similarly, the demand for housing is likely to go up. The ancillary industries of automobiles, consumer goods, housing sector are also likely to see good growth on account of this demand, says Lodha.
The average Indian household’s tendency is to funnel its savings into physical assets – gold and real estate. Physical assets accounted for more than two thirds of household savings in 2012-13, up from 48% 5 years prior to that. The trend is changing as households return to financial savings. As long as financial assets continue to hold the promise of higher yields, savers would move away from physical assets. The financial assets of the household sector during 2014-15 in bank deposits are Rs5792 bn out of total financial assets of Rs12,356 bn. The total amount of financial savings made by households was Rs8194 billion in 2014, this is an increase of 18% compared to financial savings of 2013. Household savings is expected to be around 5-7% up. Lodha expect that around Rs300 billion will be parked in banks, of which, the he expects Central Bank to mobilize around Rs 20 billion during this year out of implementation of 7th Pay Commission.