Govt payout acts as stimulus, sparks consumption

Govt payout acts as stimulus, sparks consumption

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 federal 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 more than half after the wage revision.

Chatterjee and 4.5 million other federal government workers will receive about Rs180 billion in backpay in October, the second installment of a wage increase implemented last year.

The government implemented the recommendations of a pay panel in 2008, doling out about Rs290 billion 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 NR 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 backpay 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.

Nira Talwar, a school clerk in New Delhi, whose salary also rose substantially, has bought gold jewellery, paid for her daughter’s education and saved the rest for her daughter’s marriage.

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 companies have been the major beneficiaries," said V.K. Sharma, head of research at Anagram Capital.

He said these companies would continue to benefit as the backpay for employees is to be paid out soon.

Several automakers like 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 & sales).

“We propose to give similar offers along with service benefits like extended warranty during the scheme period," he said.