Government payout acts as stimulus, sparks consumption

Government payout acts as stimulus, sparks consumption
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First Published: Wed, Sep 02 2009. 12 00 AM IST
Updated: Wed, Sep 02 2009. 12 00 AM IST
New Delhi: Life has changed for Deepika Chatterjee. She plans to buy a house, travel in a chauffeur-driven car and no longer hesitates before buying expensive airline tickets.
Chatterjee is among millions of government employees in India who are enjoying a substantial hike in pay after the Union government last year approved a larger-than-expected wage hike.
“I am thinking this is the best time to buy a house, I never thought I will have this much of money,” said Chatterjee, 51, an associate professor at Delhi University, after her monthly salary jumped by at least half after the wage revision. Chatterjee and 4.5 million other Union government workers will receive about Rs18,000 crore in back pay in October, the second instalment of a wage increase implemented last year.
The government implemented the recommendations of a pay panel in 2008, doling out about Rs29,000 crore in arrears, as well as a monthly pay hike, a move analysts say may act as a small stimulus package, boosting demand and spending. The payout, which will also benefit 3.8 million pensioners, has been staggered over a one-year period.
“If you accept this as one of the fiscal stimulus packages, I would say this is a prudent measure under current situation,” said N.R. Bhanumurthy, an economist with New Delhi-based National Institute of Public Finance and Policy. “This is a right time to do that.”
The pay rise came at a time when the private sector in India was buckling under the effect of the global financial meltdown. Robust domestic demand, thanks to cash-rich government workers, has boosted output in India’s factories and latest data showed India’s industrial output expanded at its fastest pace in 16 months in June, beating forecasts by a wide margin.
The pay rise came into effect with back pay to January 2006 and employees received the first part of their arrears in 2008-09. The remaining 60% of the arrears will be paid in October, a finance ministry official said last month.
The pay panel recommendations have prompted public sector companies, state-funded organizations and certain private sector institutions to also increase salaries.
Domestic consumption accounts for almost 60% of India’s economy, which was spared the worst of the global downturn because of robust domestic demand.
The corporate sector has also benefited as government employees have gone on a shopping spree. “Consumer durables, automobiles and FMCG (fast-moving consumer goods) companies have been the major beneficiaries,” said V.K. Sharma, head of research at Anagram Capital Ltd. He said these companies would continue to benefit as the back pay for employees is to be paid out soon.
Several auto makers such as Hyundai Motor India Ltd (HMIL) wooed cash-rich government employees when the first arrears were paid out, boosting their sales. “The promotion continued for six months with huge success and contributed more than 25% of HMIL’s retail sales,” said Arvind Saxena, senior vice-president, marketing and sales.
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First Published: Wed, Sep 02 2009. 12 00 AM IST
More Topics: Government | Stimulus | Pay | Salary | Pension |