Expert Speak India Matters
Published on Jul 18, 2016
7th Pay Commission and good monsoon: Will it boost growth?

Two themes running more or less in parallel should lift consumption and add at least a percentage and half point to the stagnant GDP growth. With the monsoon now covering the majority of the farm belt in India and the Union Cabinet approving the implementation of the recommendations of the 7th Central Pay Commission (CPC) on pay and pension while postponing the increases to allowances, the overall economy should perk up. The prospect of the monsoon session actually passing the long pending GST bill is now appearing real. This will only add further ballast to sentiment, although it will only come into effect from April 1, 2017. The monsoon and 7th Pay Commission payout are sentiment boosters for what is now a static economy. A turnaround in the rural distress story will play out with bountiful rains galvanising consumption. The reality of rural India can only be ignored by a marketer at his own peril. Though the rural market in India contributes to 70% of India’s population, 56% of income, 64% of expenditure and 33% of savings, it now accounts ball park for 50% of our $2 trillion GDP and 17% plus market growth with 68.84% of the populace residing there. As much as 54% of rural GDP now comes from non agricultural occupation and activities. The last Union Budget policies were skewed towards betterment of rural Bharat's travails and this too should begin to show up in the second half of FY17 fiscal.

Though there was some delay in the onset of monsoon (1st week of June), it has been progressing well with deviation from long period average (LPA) already reducing (from 28% on June 1 to 11% on June 30). The delayed onset of monsoon and low water levels (46% down as measured across 91 reservoirs) have resulted in slow progress of kharif sowing (-23% YoY). However, given that June accounts for only 5-6% of sowing and a clear trend would emerge only post mid-August, as per forecasts monsoon will strengthen gradually with the sowing season ending at higher note. In what should boost kharif sowing activity, both northwest and central India have received well distributed and plentiful rainfall in the first three days of July.

Northwest India, which includes the crucial agrarian belt of Punjab, Haryana and Uttar Pradesh, has got a leg up and is now 11% rain surplus for the season. The region had a slight monsoon deficit at the end of June, particularly Haryana where the shortfall was 25%. The deficit in central India, too, has fallen to 7%, with all sub divisions with the exception of Gujarat, Saurashtra and Kutch and east MP, receiving normal rains. IMD expects a bump up in monsoon in July and reckons the month to receive rainfall in the range of 107% of the long term average. Agriculturally, July is the most crucial month of the monsoon season, with most farmers beginning kharif sowing. In past years when India has topped 8.5-9% plus GDP growth, the tipping point has been provided by agriculture. All indicators and commentary indicate a pickup of rainfall and farm income could be up as much as 20% YoY in FY17 (total income by 12%) supported by an increase in net sown area, higher yield and supportive prices.

Dovetailed with the 7th Pay Commission payout, monsoon will act as a catalyst for the struggling economy where manufacturing and core sector numbers have remained disappointing. As per estimates, the additional impact of arrears and a gap in provisions poses only a minor risk (10bps) to the fiscal deficit target of 3.5% GDP in FY17 assuming the allowances are taken up only in FY18. The higher risk to the fiscal math in FY17 and hence, to spending in 2HFY17 continue to be the upcoming telecom spectrum auctions (estimated at ₹990 billion or 66 bps of GDP in the Union Budget) since 2HFY16 had seen an higher YoY growth in spending than 1H given the windfall in oil prices that, in turn, are already baked into the estimates. Already in the numbers, analysts have factored in the 7th CPC into their estimates for the consumer discretionary stocks.  The 7th PC recommendations on pay and pension have been approved by the cabinet and will be disbursed from the month of July 2016. The recurring effect of the recommendations is estimated at Rs.728 billion, including arrears (two months) the effect on FY17 numbers will be ₹849 billion. While the general budget shares a burden of ₹606 billion, Indian Railways will takeover the remaining share at ₹243 billion. Based on our estimates — ₹400 billion have already been provided in the budget — the ability of higher tax revenues to finance the deficit is only limited as higher income tax growth (18% YoY) is already assumed in the budget. But, the shortfall is a minor one.

The implementation of 7th Pay Commission will spur consumption demand on the back of higher per capita income and disbursement of arrears, no major volume surprises are expected as the effect of Pay Commission has already been taken into account. From a sector perspective,

  • In four wheelers segment, reasonable volume growth of 12% has already been built,
  • In two wheelers, there is not much upside as 2W are much easily affordable and do not carry significant aspirational value both in the urban and semi-urban markets (50-60% share),
  • For consumer appliances/durables companies we have already factored in a strong 12-13% volume growth and 3-4% pricing growth in FY17/18E, and
  • For paints, we do not expect any positive surprise to our 12-13% estimates due to 7th Pay Commission.
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