Back7th Pay Commission, low capacity utilization and the impact on inflation
The impact on inflation given the low capacity utilization will likely be softer compared with the Sixth Central Pay Commission years
Premium
A combination of a bad monsoon, lower-than-estimated gross domestic product (GDP) growth so far and weak demand is hardly good news for fresh investments, especially at a time when capacity utilization for various industries has remained low for some time.
As the chart alongside shows, the capacity utilization forecast for many industries (apart from steel) such as cement, commercial vehicles, passenger vehicles, two-wheelers for 2015-16 is in the 60-70% range. In 2014-15, capacity utilization for commercial vehicles was 54%, the lowest in at least six years. The capacity utilization of passenger vehicles has remained steady at 65% for the last two years. Note that the measure for all industries in the study was over 75% in 2009-10.
Not surprisingly, citing low capacity utilization levels and higher lending rates, Bank of America Merrill Lynch has pushed its expectation of capex recovery a year further to 2017. “Indeed, investment declined to 29.4% of GDP in June from 31% last year," say Merrill Lynch analysts.
Unfortunately, high lending rates and low capacity utilization are unlikely to change in a hurry. Given this, the expected boost to consumption demand, as a result of implementation of the Seventh Central Pay Commission (now in the recommendation stage) is more than welcome. Historically, more funds in the hands of government employees following pay hikes has boosted spending on clothing, footwear, consumer durables, vehicles and other products. As Merrill Lynch writes in another report, the Sixth Pay Commission played a key role in cushioning the economy from the Lehman shock as the first payout took place in October 2008.
What’s more, the impact on inflation given the low capacity utilization will likely be softer compared with the Sixth Central Pay Commission (CPC) years. According to Crisil Research, in 2007-08, which was the beginning of the Sixth CPC award, capacity utilization rates for passenger vehicles and cement were 75% and 95%, respectively. “So the push to income will have less of an inflationary impact compared with the Sixth CPC when consumption demand growth was relatively robust at 7-7.5% (computed as per the old GDP series)," reckons Crisil. It’s worth mentioning there will be some benefits from lower commodity prices (crude oil, metals) as well this time.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
