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Last Updated : Jun 30, 2016 01:05 PM IST | Source: Moneycontrol.com

7th Pay hike may raise consumption to 8%: Stocks you can buy now

Though 7th pay hike is lower than in 6th Pay Commission and the arrear payouts are likely to be lower, analysts still expect a consumption boost. Citi economists expect consumption growth pick up to 8.4 percent in FY17 from 7.6 percent in FY16 (marginal downside risks from potential delays in implementation of allowances hike).

 
 
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The Cabinet has approved recommendations of the 7th Pay Commission, which will grant salary hike to over one crore government employees and pensioners. The government has increased pay and pension segments while allowances have been kept on hold which will be revised over next four months. Pay hike for government employees is likely to boost consumption and bolster growth with higher spending.


Though 7th pay hike is lower than in 6th Pay Commission and the arrear payouts are likely to be lower, analysts still expect a consumption boost. Citi economists expect consumption growth pick up to 8.4 percent in FY17 from 7.6 percent in FY16 (marginal downside risks from potential delays in implementation of allowances hike). It estimates combined wage stimulus could be over 1 percent of GDP over FY17-18.

The firm sees positive impact in consumer related segments - auto, retail, durables, housing, retail banking. It has buy rating on autos (Maruti), consumer related (Titan, Voltas, Coffee Day, Phoenix Mills), retail focused banks (HDFC Bank, Kotak, IndusInd), housing finance (HDFC, LIC Housing Finance) and cement companies (Ultratech).


Macquarie believes that the wage revisions will help boost private consumption especially in urban areas thus support overall growth. It says that private consumption growth will likely improve to 8 percent in FY17 from 7.4 percent in FY16 on annual basis due to wage revisions and the one rank one pension (OROP) scheme, hopes of a good monsoon, contained inflationary pressures and lower cost of capital ,among others. As per Macquarie’s estimates 47 percent of central government employees are based in Tier 1/Tier 2 cities and rest in smaller cities.

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Credit Suissse thinks that the pay hike mostly benefits top quarter of urban consumers. Housing (rent,and likely ownership) and transportation (mainly four-wheeler purchases and fuel) are the most likely beneficiaries LIC Housing Finance, Maruti, BPCL, IOC, Kajaria and Havell's are top plays, according to the brokerage firm.

However, it also points out that railways may see the worst impact. “Delayed implementation of allowances (no arrears on them) limits impact on this year's union budget but there could still be Rs 25000- Rs 30000 crore additional costs. Better corporate profits could create some room; the 7th Pay Commission hikes should also help taxes. Early start in states would help central tax take as well,” it says in a note. 

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First Published on Jun 30, 2016 09:05 am
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