40. five plausible surprises that could make or break 2016 44...

1ST - 31ST January 2016 . Vol 3 Issue 1. For Private Circulation Only

40. Five plausible surprises that could make or break 2016

37. INTERVIEW: Rupinder Singh Sodhi

44. Indian Economy – Trend indicators

46. PhillipCapital Coverage Universe: Valuation Summary

3GROUND VIEW GROUND VIEW 1 - 31 January 2016 1 - 31 January 2016 2

VOL 3 . ISSUE 1 . 1ST - 31ST JAN 2016

Vineet Bhatnagar- Managing Director and CEO

EDITORIAL BOARDNaveen Kulkarni | Manish Agarwalla | Kinshuk Bharti Tiwari COVER & MAGAZINE DESIGN Chaitanya Modak, www.inhousedesign.co.in

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1st Dec 2015 Issue 9 1st Dec 2015 Issue 8

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Ground View - Previous Issues


4. COVER STORY: 7th Pay Commission Boost or Burden

Ground View tries to gauge the extent of the 7th PC’s impact on fiscal deficit, tax revenue, govern-ment borrowing, effect on PFCE, and of course on the very important parameters of savings, inflation, GDP and sectors

37. INTERVIEW: Rupinder Singh Sodhi

The MD of Gujarat Cooper-ative Milk Marketing Fed-eration, shares his insights on not only India’s position in the global scenario but also on the challenges and op-portunities for India’s dairy industry.

40. Five plausible surprises that could make or break 2016

44. Indian Economy – Trend indicators

46. PhillipCapital Coverage Universe: Valuation Summary

The 7th pay commission provokes different (and often

extreme) reactions from any given diaspora – but what is

common is that everybody has some sort of an opinion

about it. Some are happy about it and believe it will help

ease some of India’s current economic woes, others are

cautious, while a minor few are downright pessimistic. The

buzz surrounding the 7th PC is rising to a fever pitch as we

get closer to the FY17 Union Budget. While government

employees want bigger hikes, investors worry about the

fiscal impact of this very large PC, and the government

frets about the action that credit rating agencies will take

if their fiscal targets slip up. To bring some distilled clari-

ty to this very complex undertaking, our economist Anjali

Verma has taken an in-depth look at all issues surrounding

the 7th PC.

Although percentage increase in salaries in the 7th PC is

lowest of all the pay commissions (at 14%) the payout is

as large as a whopping Rs 1 trillion. Due to its size, it’s

bound to hit the government’s fiscal balances – centre,

states, and government companies. This in turn could lead

to lesser money availability for developmental spending,

in case the government wants to stick to the path of fiscal

consolidation.

In this GV edition, we have looked at past pay commissions

(5th and 6th) and their impact on various macro variables

and the sectors in order to gauge the impact of the im-

pending 7th PC. Macro factors studied include – centre’s

fiscal deficit, states’ fiscal deficit, consumption, savings,

inflation, taxes, investments, and government borrowing.

All our analysts pitched in to create a comprehensive

survey and we have gauged the sector impact based on

empirical evidence and the feedback we have received

from various government employees across ranks, depart-

ments, and cities. We received some responses that we

did not really anticipate, considering that 7th PC and its

implications are already covered by much of the financial

and general media. Read on to get our holistic, fresh, and

incisive picture on the 7th PC, less than a month before its

likely impending launch!!

Best Wishes

Vineet

CONTENTSFrom the MD


COVER STORY

BY ANJALI VERMA

ORBOOST BURDEN?

thPAY CO M M I S S I O N7


pg. 6 The 5th and 6th PCs: Packed a punch PCs generally provoke a powerful response – both in terms of a consumption boost and stress on fiscal______________________________________pg.10 7th PC: The Rs 1tn behemoth Details of the 7th PC______________________________________pg.23 Pay commissions and consumption A much needed stimulus for the economy______________________________________pg.26 GV survey Real estate will be the key beneficiary______________________________________pg.27 7thPCandthefiscal Healthy stress for now______________________________________pg.34 7thPCandMacrovariables Positive impact on savings, investments, and GDP

Pay commissions, usually eagerly awaited by government employees, result in salary upgradations every ten years for central government employees; state governments also implement these – albeit with a lag. While these commissions usually disturb fiscal calculations and developmental spending, they promote consumption. The seventh pay commission hikes are coming at a time when economic growth is weak and recovery is largely reliant on government spending, as the private sector reels under excess capacity, weak demand, and lack of funds.

The seventh pay commission (7th PC) has recommended a 14% increase in the salaries of government employees effective 1st January 2016. This is the lowest-ever hike recommended by any pay commission so far – average hikes implemented by the last three pay commissions have been 30-50%. Also, this time the hikes are not likely to be backdated. These factors inherently limit the impact that the hikes will have on stimulating demand. However, any positive impact in the current economic scenario is a welcome boost. The fiscal dent (% of GDP) will be almost similar to previous pay commissions despite the fact that the 7th PC is a monster in sheer size at Rs 1tn vs. Rs 260bn in the 6th PC.

In this issue, Ground View tries to gauge the extent of the 7th PC’s impact on fiscal deficit, tax revenue, government borrowing, effect on PFCE, and of course on the very important parameters of savings, inflation, GDP, and sectors. It was also important to analyse the impact on central and state government finances and to check if there was any adverse impact on capital spending. GV polled government employees across various sectors, states, and grades to understand how they would choose to spend the increase in their income. Read on to delve deep into the complex world of pay commissions and to find out if their impact justifies the hype that invariably surrounds them.


THE first pay commission was set up in 1946, and

became a decennial event since then. In all, sev-

en pay commissions have been set up in India.

The objective of a pay commission is to revise

the salaries of the central government employees (current

strength: 3.3mn). Top-25 Indian cities (by population) ac-

count for 80% of central government employees – they

have a significant presence in Bengaluru, Kolkata, Mum-

bai, and Vishakhapatnam.

Usually, state governments also follow the recommenda-

tions of the pay commissions and implement similar hikes

for their employees. Even the salaries of public sector em-

ployees are also typically revised in line with the PC recom-

mendations – however, these come with a lag and the ex-

tent of the revision is contingent on company performance.

Central pay commissions are applicable to all central gov-

ernment employees of:

• All India Services

• Personnel of Union Territories

• Indian Audit and Accounts Department

• Regulatory Bodies

• Supreme Court

• Defence Forces

Salary hikes by pay commissions have always been more

than 14% and the 4th, 5th, and 6th PCs recommended the

maximum hikes at 28%, 31%, and 54%. The fiscal impact

was most significant during the 5th and 6th PCs – this will

also be true for the 7th PC hikes (once implemented).

PCs generally provoke a powerful response – both in terms of a consumption boost and stress on fiscal

T H E 5 T H A N D 6 T H P C S : PA C K E D A P U N C H

Most of the respondents expected a hike of 25-35% in the seventh pay commission award. Defence personnel are largely unhappy with the quantum of the hike – GV survey takeaway

Details of pay commissions

FIRST PAY COMMISSION

SECOND PAY COMMISSION

THIRD PAY COMMISSION

FIFTH PAY COMMISSION

SIXTH PAY COMMISSION

SEVENTH PAY COMMISSION

FOURTH PAY COMMISSION

SET UP May-1946

SET UP Aug-1957

SET UP Apr-1970

SET UP Apr-1994

SET UP Jul-2006

SET UP Sep-2013

SET UP Jun-1983

SUBMITTED May-1947

SUBMITTED Aug-1959

SUBMITTED Mar-1973

SUBMITTED Jan-1997

SUBMITTED Mar-2008

SUBMITTED Nov-2015

SUBMITTED Jun-1987

`1.4 bnFINANCIAL IMPACT

`185 bnFINANCIAL IMPACT



`1.3 bnFINANCIAL IMPACT

21%% INCREASE

31%% INCREASE

54%% INCREASE

23.6%% INCREASE

28%% INCREASE

IMPACT PERIOD 1997-1999



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PC Caused huge fiscal distress, but government spending was steady

This commission’s recommendations were__________________________________________________________

A 20% SALARY HIKE__________________________________________________________

REDUCE GOVERNMENT WORKFORCE BY 30% (NOT IMPLEMENTED) __________________________________________________________

REDUCE NUMBER OF PAY SCALES TO 34 FROM 51 (IMPLEMENTED) __________________________________________________________

LEAVE ABOUT 0.35MN POSITIONS VACANT TO REDUCE FISCAL STRESS __________________________________________________________

Central government pay & allowances, pensions, and select budgetary items (% OF GDP AT CURRENT MARKET PRICES)

Year Pay & Allowances

Pension Committed liability

Revenue Expendi-

ture

Capital Expenditure

Tax Revenue

Non-tax Revenue

Gross Fiscal Deficit

RevenueDeficit

1994-95 1.53 0.35 1.88 11.68 3.69 6.45 2.26 5.52 2.97

1995-96 1.49 0.29 1.78 11.4 3.13 6.68 2.3 4.91 2.42

1996-97 1.46 0.29 1.74 11.2 2.96 6.6 2.3 4.7 2.3

1997-98 1.7 0.3 2 11.47 3.29 6.08 2.43 5.66 2.95

1998-99 1.78 0.31 2.09 12 3.49 5.8 2.49 6.29 3.71

1999-00 1.71 0.3 2.01 12.31 2.42 6.34 2.63 5.18 3.34

2000-01 1.59 0.3 1.89 12.76 2.19 6.28 2.57 5.46 3.91

2001-02 1.36 0.31 1.67 12.8 2.58 5.67 2.88 5.98 4.25

2002-03 1.33 0.33 1.67 13.35 2.94 6.25 2.85 5.72 4.25

2003-04 1.23 0.32 1.55 12.74 3.84 6.58 2.7 4.34 3.46

2004-05 1.21 0.3 1.51 11.85 3.51 6.93 2.5 3.88 2.42

Source: RBI, PhillipCapital India Research

I M P A C T • Pay and pension increased by 30%

• At Rs 185bn, this commission had one of the worst fiscal impacts. Its financial impact per-sisted for four years until 2000 – fiscal deficit shot up to 5.7% in FY98 and 6.3% in FY99 from 4.7% in FY97. Financial burden of the fifth pay commission was 1% of GDP

• States implemented pay hikes between FY99 and FY01 and experienced a similar fi-nancial burden

• The World Bank compared the financial dis-tress of the fifth pay commission with India’s 1991 balance-of-payments crisis

• The government’s capital spending stayed on course – the pay commission did not have a significant impact

5th

This was set up in 1994 and implemented in 1997-99. A sub-

stantial increase (31%) in salaries resulted in significant fiscal

stress on the books of central and state governments.


State governments pay & allowances, pensions, and select budgetary items(% OF GSDP AT CURRENT MARKET PRICES)



Revenue Expenditure

CapitalExpenditure

Tax Revenue

Non-tax Revenue


RevenueDeficit

1994-95 3.19 0.59 3.77 12.15 3.07 5.16 3.97 2.61 0.64

1995-96 3.07 0.64 3.71 11.67 2.57 5.01 3.56 2.52 0.7

1996-97 3.22 0.69 3.92 11.76 2.28 4.83 3.27 2.58 1.19

1997-98 3.7 0.74 4.44 11.72 2.52 4.78 3.06 2.76 1.11

1998-99 3.96 0.9 4.85 12.05 2.45 4.78 2.63 4.06 2.47

1999-00 4.27 1.12 5.39 12.73 2.5 4.93 2.95 4.45 2.7

2000-01 4.34 1.17 5.51 13.22 2.39 5.17 3.13 4.04 2.54

2001-02 4 1.2 5.2 13.15 2.5 5.2 3.14 4 2.56

2002-03 3.79 1.22 5.01 13.04 3.13 5.42 3.16 3.93 2.25

2003-04 3.53 1.16 4.69 13.11 4.99 5.47 3.1 4.25 2.23

2004-05 3.25 1.15 4.41 12.42 4.65 5.61 3.17 3.32 1.21Source: RBI, PhillipCapital India Research

Came during the financial crisis, increasing stress

Other features:__________________________________________________________

SALARIES INCREASED BY A WHOPPING 54%__________________________________________________________

MINIMUM SALARY WAS SET AT RS 6,660 AND MAXIMUM SALARY AT RS 80,000 (SECRETARY LEVEL) __________________________________________________________

MINIMUM:MAXIMUM PAY RATIO WAS SET AT 1:12 __________________________________________________________

NUMBER OF PAY GRADES WAS REDUCED TO 20 FROM 35 EARLIER __________________________________________________________

ANNUAL INCREMENTS WERE SET AT 2.5%__________________________________________________________

I M P A C T • The recommendations were im-

plemented within four months of report submission.

• Total financial impact was Rs 80bn in 2008-09 plus Rs 181bn in one-time arrears.

• Implementation/payment was spread over two years.

• Fiscal deficit shot up to 6% and 6.4% in FY09 and FY10 from 2.9% in FY08. This includes the adverse impact of the international finan-cial crisis. Total impact of sixth pay commission was Rs 260bn or 0.42% of GDP (0.77% of GDP based on new methodology).

• The government’s plan capital expenditure continued to expand – (+27% in FY09, +26% in FY10).

6th

This commission submitted its report in March 2008,

but its recommendations were made effective from 1st

January 2006 – this led to huge payouts (as arrears) by

the government – 40% of the arrears were paid in 2008-

09 and remaining 60% in 2009-10.

PC


Central Government pay & allowances, pensions, and select budgetary items ( % OF GDP AT CURRENT MARKET PRICES)



Revenue Expenditure

Capital Expenditure

Tax Revenue

Non-tax Revenue


Revenue Deficit

2005-06 1.08 0.28 1.35 11.90 1.80 7.32 2.08 3.96 2.50

2006-07 0.98 0.27 1.26 11.98 1.60 8.18 1.94 3.32 1.87

2007-08 0.91 0.29 1.20 11.92 2.37 8.81 2.05 2.54 1.05

2008-09 1.18 0.32 1.49 14.10 1.60 7.87 1.72 5.99 4.50

2009-10 1.36 0.32 1.68 14.08 1.74 7.05 1.79 6.46 5.23

2010-11 1.11 0.31 1.42 13.37 2.01 7.32 2.81 4.80 3.24

2011-12 1.03 0.29 1.33 12.72 1.76 6.99 1.35 5.73 4.38

2012-13 1.04 0.29 1.34 12.30 1.65 7.34 1.36 4.85 3.60

2013-14 1.10 0.30 1.39 12.33 1.68 7.36 1.69 4.62 3.26


State governments pay & allowances, pensions, and select budgetary items (% OF GDP AT CURRENT MARKET PRICES)



Revenue Expenditure

Capital Expenditure

Tax Revenue

Non-tax Revenue


Revenue Deficit

2001-02 4.00 1.20 5.20 13.15 2.50 5.20 3.14 4.00 2.56

2002-03 3.79 1.22 5.01 13.04 3.13 5.42 3.16 3.93 2.25

2003-04 3.53 1.16 4.69 13.11 4.99 5.47 3.10 4.25 2.23

2004-05 3.25 1.15 4.41 12.42 4.65 5.61 3.17 3.32 1.21

2005-06 2.94 1.10 4.04 11.86 3.35 5.74 3.38 2.44 0.19

2006-07 2.88 1.09 3.97 11.77 3.53 5.88 3.67 1.80 -0.58

2007-08 2.73 1.12 3.85 11.65 3.44 5.74 3.73 1.51 -0.86

2008-09 3.09 1.19 4.28 12.92 3.79 5.73 3.76 2.39 -0.23

2009-10 3.61 1.35 4.96 12.92 3.37 5.61 3.71 2.91 0.48

2010-11 2.79 n.a n.a 11.98 2.91 5.92 3.28 2.07 0.04

2011-12 3.59 n.a n.a 12.60 3.30 6.17 3.67 1.87 0.07

2012-13 3.65 n.a n.a 12.74 3.40 6.38 3.79 2.31 0.42

2013-14 3.89 n.a. n.a. 2.16



7 T H P C : T H E R S 1 T N B E H E M O T H

“The key expectation of employees at all levels is that there should be a significant increase in their pay and improvement in other facilities. Representatives of some of the recognised organisations have staked their claims for grant of a pay structure comparable to that of the private sector.”- 7th PC

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_____________________

TRANSPARENCY IN ALLOWANCES –

REDUCE ALLOWANCES AND MAKE THEM MORE RELEVANT.

_____________________

STREAMLINE PENSIONS OF EMPLOYEES CURRENT-LY COVERED UNDER OLD PENSION SCHEME.

_____________________

INTRODUCTION OF ‘PERFORMANCE RELAT-ED’ PAY (AND BONUSES) FOR ALL CATEGORIES OF CENTRAL GOVERNMENT EMPLOYEES.

____________________

BETTER HEALTH SERVICES (MEDICAL INSURANCE) FOR CURRENT AND RETIRED EMPLOYEES.

_____________________

ATTRACT AND RETAIN HIGH QUALITY STAFF

_____________________

MOTIVATE THE WORK-FORCE TO WORK HARD

_____________________

INDUCE OTHER RE-SOURCE MANAGEMENT REFORMS

_____________________

ENSURE LONG-TERM FISCAL SUSTAINABILITY

_____________________

EMOLUMENTS DO NOT REFLECT QUALIFICATIONS AND SKILL SET NOR THE HIERARCHY

_____________________

DIFFERENT SALARIES FOR SIMILAR CADRES

_____________________

DIMINISHING OR NON-EXISTENT AVENUES OF PROMOTION

_____________________

COMPLICATED PAY MATRIX

The key focus areas of the commission

7th PC’s mantra for salaries

Problems highlighted by central government employees in the survey

The 7th PC was set up in February 2014 and submitted its final report

to the finance ministry in November 2015. The finance ministry is in the

process of reviewing the recommendations and final implementation will

depend on what it accepts and rejects. The word on the street is that

the government may not accept all recommendations – therefore, out of

the total estimated financial dent of Rs 1tn for the 7th PC, the govern-

ment is expected to save about Rs 300bn.

PC7th

1200

1000

800

600

400

200

0

Pay commission reward (Rs bn)

Fifth PC Sixth PC Seventh PC

D E TA I L S


“The real challenge before this commission is to provide a pay structure that is competitive yet affordable, attractive yet acceptable, forward-looking yet adaptable, simple yet rational, and one that matches the current socio-economic and political conditions as well as the changing perception of the overall administrative machinery and the public governance system” – 7th PC

The 7th pay commission’s solutions

The commission has tried to ad-

dress these problems and rec-

ommended/proposed:

• The entire pay structure should

be reviewed, rationalised, and

simplified

• Inter-departmental and in-

ter-ministerial disparities regard-

ing payment of various allowanc-

es should be removed as far as

possible

• An innovative ‘risk and hardship’

matrix should be introduced

• Uniformity in qualification and

pay structure: At each level, the

minimum pay should be equal to

the entry pay for direct recruits

into those levels. Currently en-

try pay takes into consideration

qualifying standards – salaries of

those promoted from lower levels

is set at minimum pay of the band

plus grade pay corresponding to

the new grade; therefore entry

pay varies for someone entering

a level directly and someone get-

ting promoted. The new pay ma-

trix proposes that direct recruits

start at the minimum pay corre-

sponding to the level at which the

recruitment is made.

• Each level should be placed

equidistantly – implying that var-

ious stages within a level move

up at the rate of 3% per annum

- similar to the rate of annual

increment within a level (recom-

mended at 3%)

• Salaries should be raised more

(than currently practiced) in case

of promotions

• Uniformity in fixing pay (wheth-

er entry-level, on promotion, or

while migrating from one pay re-

gime to another)

• New pay structure should bring

out clearly what the total emolu-

ments will be at a given point in

time during the employee’s ca-

reer span

• The rate of pay progression

should be stated upfront for ex-

isting and new entrants

• Strong need to encourage, re-

ward, and promote performance

• All non-performers should be

phased out in 20-years – a strong

recommendation

• Performance-related pay should

be introduced and all bonus pay-

ments should be linked to pro-

ductivity

“The organisation systems in the government are generally large, multi-layered, and complex.”

– 7th PC

Rs Bn 2016-17 2016-17

(Without 7th PC)

(With 7th PC)

Financial Impact

% Increase

Pay 2443 2834 391 16.0

Allowances 0 0 0

HRA 124 296 172 138.7

TPTA 99 99 0 0.0

Other Allowances 243 364 121 49.8

Pension 1426 1763 337 23.6

TOTAL 4335 5356 1021 23.6

Source: 7th PC

Rs Bn Borne on the General

Budget

Borne on the Railway

Budget

Total

Pay 277.5 113.5 391

Allowances 0 0

HRA 132 40 172

TPTA 0 0 0

Other Allowances 85 36 121

Pension 242 95 337

TOTAL 736.5 284.5 1021

Source: 7th PC

Break-up of 7TH PC financial burden

Break-up of financial burden between government and railways


7th PC new pay model

The 7th PC has suggested a new pay model after receiving feedback from various employees. Here are the details:

• • System of pay bands and grade pay should be removed. Has proposed new functional levels.

• New pay structure is in the form of a pay matrix to provide complete trans-parency about pay progression.

• Minimum pay at Rs 18,000 per month.

• Fitment factor of 2.57 – multiply cur-rent salaries by 2.57 to arrive at new pay scale.

• Annual increment at 3%.

• Highest pay fixed at Rs 250,000 per month.

• Compression ratio is at 1:3.12 imply-ing that entry-level salaries of Group A employees is 3.12x higher than those of entry-level Group C employ-ees.

• Compression ratio is at 1:3.96 for maximum salary.

• New salaries will be effective from 1st January 2016 vs. the demand of 1st January 2014.

• Employees unable to meet perfor-mance criteria within the first 20 years of their service should not receive future annual increments or should be asked to leave service (voluntary retirement).

Existing Pay Bands

Existing levels of

Grade Pay

Available for*

New Levels

PB-1 1800 C 1

1900 C 2

2000 C,D 3

2400 C 4

2800 C,D 5

PB-2 3400 D 5A

4200 C,D 6

4600 C,D 7

4800 C,D 8

5400 C 9

PB-3 5400 C,D,M 10

5700 M 10A

6100 D 10B

6100 M 10B

6600 C,D,M 11

7600 C 12

PB-4 7600 M 12

8000 D 12A

8400 M 12B

8700 C 13

8700 D 13

8900 C 13A

8900 D 13A

9000 M 13B

10000 14

HAG 15

HAG+ 16

Apex 17

Cabinet Secretary, Defence Chiefs 18*C: Civil; D: Defence; M: Military Nursing Service (MNS)

Levels as per pay matrix Rationalization applied to present pay structurePay Band 1 (5200-20200)

Grade Pay 1800 1900 2000 2400 2800

Current Entry Pay 7000 7730 8460 9910 11360

Rationalised Entry Pay (2.57)

7000*(2.57) =18000

7730*(2.57) =19900

8460*(2.57) =21700

9910*(2.57) =25500

11360*(2.57) =29200

Pay Band 2 (9300-34800)

Grade Pay 4200 4600 4800 5400

Current Entry Pay 13500 17140 18150 20280


13500*(2.62) =35400

17140*(2.62) =44900

18150*(2.62) =47600

20280*(2.62) =53100

Pay Band 3 (15600-39100)

Grade Pay 5400 6600 7600

Current Entry Pay 21000 25350 29500


21000*(2.67) =56100

25350*(2.67) =67700

29500*(2.67) =78800

Pay Band 4 (37400-67000)

Grade Pay 8700 8900 10000

Current Entry Pay 46100 49100 53000

Rationalised Entry Pay (2.57/2.67/2.72)

46100*(2.57) =118500

49100*(2.67) =131100

53000*(2.72) =144200

HAG (67000-79000)

Current Entry Pay 67000


67000*(2.72) =182200

HAG+ (75500-80000)

Current Entry Pay 75500


75500 *(2.72) =205400

Apex 80000 (fixed)

Rationalised Pay (2.81)

80000*2.81 =225000

Cabinet Secretary 90000 (fixed)

Rationalised Pay (2.78)

90000*2.78 =250000

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In FY13, total expenditure on salaries was Rs 1.3tn (1.3% of GDP); payout has dou-

bled in the last six-years. At the time of implementation of sixth pay commission (in

FY09-10), salary expenditure increased by 90%. Annual increases in the following

years were at 10%. The ministry of railways spends the highest on salaries, fol-

lowed by home affairs, defence, posts, revenue, and urban development. Average

per-person expenditure was Rs 400,000 per annum.

Total expenditure on salaries

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Central govt expenditure on salaries (% of GDP)Central govt expenditure on salaries (Rs bn, growth)

Ministry/ Department

PIP as on 01.01.2014

(in Mn)

Total Expenditure on Pay and Allowances

in FY 2012-13 (Rs bn)

Per Capita Expenditure on Pay and Allowances in FY 2012-13 (Rs mn)

Percentage of

PIP-Group wise

A B C

Railways 1.3 550 0.42 1 1 99

MHA incl. CAPFs 1.0 291 0.30 2 6 92

Defence (Civil) 0.4 129 0.32 4 15 81

Posts 0.2 77 0.41 1 4 96

Revenue 0.1 49 0.51 6 43 51

IA&AD 0.0 23 0.48 1 67 32

Urban Develop-ment

0.0 11 0.36 5 23 72

Atomic Energy 0.0 21 0.66 27 38 35

Health 0.0 14 0.67 14 24 62

Others 0.2 130 0.69 16 26 58

Total 3.3 1296 0.39 3 9 88

Source: 7th PC

Department-wise salary expenditure


Department-wise salary expenditure

% in groups

Ministry/ Department PIP as on 01.01.2014

Total Expenditure on Pay and Allowances

in FY 2012-13 (Rs bn)

Per Capita Expenditure on Pay and Allowancesin FY 2012-13 (Rs mn)

A B C

External Affairs# 3,037 10.6 3.5 37 38 25

New & Renewable Energy 187 0.2 1.1 43 19 38

Food Processing 114 0.1 0.8 37 26 37

Electronics and IT 5,260 4.0 0.8 57 27 16

Power 1,044 0.8 0.7 31 30 39

Source: 7th PC

Average per employee annual salary expenditure in various ministries (Rs mn)

Sour

ce: 7

th P

C, P

hilli

pCap

ital i

ndia

Res

earc

h

As per the Standard of Financial Propriety – the amount of allowances granted to meet expenditure of a particular type should be so regulated that the allowances are not, on the whole, a source of profit to the recipients.

Pay commissions can give only as much as the government can support. The pay commission recommendations are reasonable – I will be more than happy if the recommendations are implemented as it is – A respondent to GV’s survey on 7th PC

Per capita expenditure was higher for ministries that had greater A group employees

(external affairs, renewable energy, food processing, electronic & IT, and power).


An allowance is the sum of money paid to

the employee for a specific purpose. For

the government employees, allowance

is an addition to their basic pay (paid as

a proportion on basic pay or as a fixed

amount). 7th PC’s observations include:

• Allowances are quite large and need to

be streamlined, as is the case internation-

ally

• Need for continuation and coverage has

been looked at

• Rationalisation continued

As per the Standard of Financial Propri-

ety – the amount of allowances granted

to meet expenditure of a particular type

should be so regulated that the allowanc-

es are not, on the whole, a source of profit

to the recipients.

___________________

ABOLISH 52 ALLOW-ANCES, SUBSUME 36 IN OTHER EXISTING CATEGORIES

___________________

FIXED ALLOWANCES (NOT INDEXED TO DA) TO BE RAISED 2.25X

___________________

FIXED ALLOWANCES (PARTIALLY INDEX TO DA) TO BE RAISED 1.5X

___________________

FIXED ALLOWANCE, FULLY INDEX TO DA, WILL REMAIN UN-CHANGED

___________________

PERCENTAGE-BASED ALLOWANCES TO INCREASE 0.8X

Current allowance structure

Category No. of Allowances

Allowances payable for Additional/Extra Duty 14

Allowances related to Knowledge Updates 3

Allowances related to Deputation 3

Allowances related to Working on Holidays 3

Allowances related to Housing 7

Allowances related to Good Service 4

Qualification Allowances 15

Allowances related to Risk and Hardship 51

Allowances for Running Staff of Indian Railways 13

Allowances related to Sports 2

Sumptuary Allowances 5

Allowances related to Training 2

Allowances related to Travel 13

Allowances related to Uniform 9

Other Allowances 52

Total: 196Source: 7th PC

Respondents are unhappy about discontinuation of few allowances

– Takeaway from GV’s survey

“Would have been happy if existing privileges and allowances had continued”

– GV survey respondent

Recommendations

Allowances


Pension expenditure (Rs Bn, growth) Pension expenditure as % of GDP

Sour

ce: 7

th P

C

“Pension scheme, consistent with availa-

ble resources, must provide that a pen-

sioner would be able to live free from

want, with decency, independence and

self-respect, and at a standard equiva-

lent to pre-retirement levels” – Supreme

Court judgement

Currently, 50% of last pay drawn is treat-

ed as pension for central government

employees.

Strength of pensioners

Pensioners are classified into civil and

defence – within civilians, large sectors

are central civil, railways, and postal.

Expenditure on pension

Total pension expenditure as on 1st Jan-

uary 2014 stood at Rs 1tn (0.9% of GDP).

In FY09-10, after the 6th PC, pensions

rose by a cumulative 100% (increase

from 0.7% of GDP in FY08 to 1.2% in

FY10) – similar to salaries. After that, av-

erage increase has been to the tune of

7.8% in FY12 and 14% in FY13.

Pensions

Sour

ce: 7

th P

C

DEFENCE (36%)

RAILWAYS (26%) DEFENCE CIVILIAN (11%)

CENTRAL CIVIL (21%)

POSTAL (6%)

TOTAL PENSIONERS 5.2 mn (AS ON 1ST JANUARY 2014 )

AGE ANALYSIS OF PENSIONERS (AS ON 1ST JANUARY 2014 )

37% >60 and <70 yrs.

26% <60, >100 yrs.2% 90 to <100 yrs.

9% 80 to <90 yrs.

26% 70 to <80 yrs.


CPC Min. Pension Max. Pension

IV CPC 375 4,500

V CPC 1,275 15,000

VI CPC 3,500 45,000

Source: 7th PC

Pension levels as per various PCs

Limit as per Amount (Rs Mn)

IV CPC 0.10

V CPC (Interim Report) 0.25

V CPC (Final Report) 0.35

VI CPC 1.00

Source: 7th PC

Gratuity limit as per various PCs

7th PC recommends:

• Minimum pension should be increased to Rs 9000 from

Rs 3500 – in line with minimum recommended salary.

• Gratuity limit should be enhanced to Rs 2mn from

current Rs 1mn.

An analysis of the 7th PC reveals that:

1. A lion’s share of central government employees

(88%) are either industrial or operational work-

force. Therefore, the contention that the central

government’s wage bill is for administrative pur-

poses is ill conceived. Thus, government’s work-

force is doing a qualitative job, in accordance

with the needs of the government machinery. As

a large number of personnel employed by the

government are through contracts, a major seg-

ment of government function has been pushed

into informal sectors – not a clear positive.

2. Expenditure on pay and allowances as a percent-

age of revenue expenditure has been falling

over the years, implying that rise in salaries has

not been out of proportion.

Total central government employees in 2014 were

4mn – of which 40% were with railways, 38% others

(largely home ministry [police]), about 15% were with

defence, and 7% with communication and IT. Gov-

ernment employment in telecommunications has

fallen substantially since 1994 due to corporatisation

of the sector. While absolute employment in railways

was stable, it was declining for defence and rising for

police.

Annual Direct Recruitment Plan (ADRP) was set up

by the fifth pay commission, which resulted in a con-

sistent fall in the strength of government employees.

As a guideline, new hiring was set at 1% of the staff

strength and retiring employees at 3%. As a result,

net employee strength reduced by 2% every year

since 2001-2009. ADRP was discontinued after the

recommendations of the 6th PC as it led to important

positions remaining vacant and to an ageing bureau-

cracy that was reluctant to change and adopt tech-

nology. Now these decisions are made by individual

ministries and departments.

Size and nature of government employees

“Same pay (specially at the entry level) must be given to similar minimum qualification, like is the case for all doctors; however, for graduates and post graduates, it varies from department to department”

– A central government employee responding to GV’s survey


Total sanctioned strength of the govern-ment employees in various departments

1957 1971 1984 1994 2006 2014

in Mn

Communications and IT 0.2 0.4 0.7 0.8 0.3 0.3

Railways 1.0 1.4 1.5 1.5 1.6 1.6

Defence (Civilian) 0.3 0.6 0.7 0.7 0.6 0.6

Others 0.3 0.6 0.9 1.2 1.2 1.5

Total 1.7 3.0 3.8 4.2 3.7 3.9

%oftotal

Communications and IT 11.4 13.2 18.1 18.1 7.3 6.7

Railways 57.4 46.9 39.7 37.0 43.2 39.9

Defence (Civilian) 15.0 20.0 19.1 16.1 16.3 15.0

Others 16.2 19.9 23.1 28.8 33.2 38.4

Source: 7th PC

01.01.2006 01.01.2010 01.01.2014

Ministry/ Department Sanctioned Strength

Persons in Position

Vacant positions

Sanctioned Strength

Persons in Position

Vacant positions

Sanctioned Strength

Persons in Position

Vacant positions

Railways 1.6 1.4 -0.2 1.6 1.4 -0.2 1.6 1.3 -0.2

MHA incl. CAPF# 0.8 0.7 -0.1 0.9 0.8 -0.1 1.1 1.0 -0.1

Defence (Civil) 0.6 0.5 -0.2 0.6 0.4 -0.2 0.6 0.4 -0.2

Posts 0.3 0.2 0.0 0.3 0.2 -0.1 0.3 0.2 -0.1

Revenue 0.1 0.1 0.0 0.1 0.1 0.0 0.2 0.1 -0.1

IA&AD# 0.1 0.0 0.0 0.1 0.0 0.0 0.1 0.0 0.0

Urban Development 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Atomic Energy 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Health* 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Others 0.2 0.2 0.0 0.2 0.2 0.0 0.3 0.2 -0.1

Total 3.8 3.3 -0.6 3.9 3.2 -0.7 4.0 3.3 -0.7Source: 7th PC

Department-wise vacant positions

After ADRP was dismantled, hiring shot up with max-

imum hiring (81% of total) by the ministry of railways

and in the police force. Average annual hiring by the

central government between 2006-2014 was 100,000.

The seventh pay commission is of the view that the

central government is an insignificant source of em-

ployment generation. However, the fact is there are

substantial (most in the last 10 years) vacant positions

in these ministries – about 700,000 people need to

be hired (200,000 each in defence and railways and

100,000 each in home ministry, postal, and revenue).

Sector-wise break-up of government employees

Sour

ce: 7

th P

C

Global comparison

There are 14 central government employees for

every million people in India; USA has 67. In India,

government employees are saturated in few de-

partments such as police, defence, and railways,

which is also the case in the USA where its depart-

ment of defence, homeland security, and veteran

affairs employs 94% of government employees.

“One should get proper and adequate compensation for merit. The increase in pay structure cannot keep pace with the market forces (private sector). At the same time, it should not be so unattractive that talent is not attracted to government service.” – 7th PC


Categories of government employees

Grades are based on pay band. For central government employ-

ees, groups are categorised as A, B, and C. Maximum employ-

ment is in the C grade.

• 89% of the government employees are in group C, 8% in

group B, and 3% in group A.

• C-group employees constitute the highest group – 99% of total

employees in railways, 96% in postal, and 92% in home affairs.

• Scientific and technical-focused departments (space, electron-

ics, IT, renewable energy, civil aviation, and external affairs)

have higher proportion (57-37%) of employees in group A.

Number of group-wise employees in everyministry/department are given below

Ministry/ Depart-ment

Persons in Position as on

01.01.2014

Group `A’ Group `B’ Group `C’

Railways 13,15,688 8,493 7,283 12,99,912

MHA incl. CAPFs 9,80,114 16,090 60,162 9,03,862

Defence (Civil) 3,98,422 17,160 59,415 3,21,847

Posts 1,89,771 527 6,826 1,82,418

Revenue 95,812 5827 40,907 49,078

IA&AD 48,164 605 32,105 15,454

Urban Development 30,665 1539 6967 22159

Atomic Energy 32,330 8,515 12,404 11,411

Health 21,061 2997 4972 13092

Others 1,89,509 29,748 49,851 1,09,910

Total 33,01,536 91,501 2,80,892 29,29,143 Source: 7th PC

Age profile of central government employees

As of 1st January 2014, the largest chunk (29%) of cen-

tral government employees were in the age group 50-

59 followed by (26%) in 40-49, while 22% (each) were in

the bracket 30-39 and 20-29.

Some key conclusions:

• Ministries that have many employees in the 50-60 year

age bracket and at high risk for loss of experienced em-

ployees – these include textiles 75%, coal 64%, urban

development 62%, petroleum & natural gas 60%, sci-

ence & technology 57%, heavy industry 56%, new & re-

newable energy 52%, AYUSH 51%, and power 50%. 7th

PC finds that these ministries will lose experienced em-

ployees in the next 10 years and advises departments to

prepare/train younger employees to meet current and

future requirements.

• The youngest population of employees is thriving in

the ministry of home affairs with 40% in the age group

20-30, followed by 16% in railways, and 15% in postal.

• The proportion of younger employees in smaller min-

istries (drinking water, panchayati raj, parliamentary af-

fairs, rural development) is much lower vs. larger ones.

“The remuneration package is such that employees would feel that they are valued, are fairly paid, and their

remuneration is not less than a person who is similarly situated in another organisation. While addressing this aspirational need, we are also conscious of the fact that

such employees who have outlived their utility, their services need not be continued, and the continuance of

such persons in the system should be discouraged.” – 7th PC

Department-wise central government employees in various age groups

Sour

ce: 7

th P

C


Total expenditure on contractual employees

by the government was Rs 3bn in FY13. Con-

tractual employees comprise of:

• Housekeeping, maintenance, related activ-

ities, data entry, driving etc.

• Contractual employment for certain techni-

cal posts with high professional skills.

• Retirees from the government – hired due

to their expertise, experience, and knowl-

edge.

The seventh pay commission (with the inputs

from various ministries) has recommended

that contractual employment should be con-

tinued, but with appropriate guidelines about

the kind of jobs that can be outsourced. At

the same time, critical posts requiring confi-

dentiality should not be outsourced. The cur-

rent spending on contractual employment

is insignificant, but likely to rise gradually. In

the light of more retiring personnel from var-

ious ministries, the pay commission suggests

that more retired employees should be hired

due to their experience and expertise.

Annual expenditure on contractual manpower

Ministry/ Departments (Rs bn) (F.Y. 2012-13)

Urban Development 0.01

Atomic Energy 0.10

Posts 0.20

Police incl. CAPFs 0.26

Health 0.27

IA&AD 0.28

Railways 0.35

Others 1.54

Total 3.00Source: 7th PC

The results of an IIM (Ahmedabad) study compar-

ing working families in the government and private/

public sectors has brought out that while salaries are

much lower at lower levels in the private sector vs.

government jobs, at the highest echelons of govern-

ance, government compensation is nowhere compa-

rable (much lower) than the private/public sector.

As number of years in employment increase, the gov-

ernment’s minimum pay + DA becomes larger than

the private sector’s minimum wage + VDA (variable

dearness allowance), even though the basic minimum

wage in both sectors is calculated on the basis of the

15th ILC (Indian Labour Commission) norms. As on

1st January 2015, the minimum pay in the govern-

ment was Rs 14,910 while the minimum wage for a

skilled worker was Rs 9,000–Rs 11,000 per month. For

the government employees, minimum wage comes

out to be much higher at Rs 21,000+ including, oth-

er allowances such as house rent, transport, location,

functions, and LTA – which is much higher than the

minimum pay for private sector employees. The IIM

study concluded that total emoluments of a helper (in

government service) were ~Rs 23,000, more than two

times that of a private sector employee at the same

position who drew Rs 8,000-9,500).

However, the commission notes that government

employees are entitled to a host of tangible and

non-tangible benefits – job security, inflation-indexed

salary, assured prospects of financial progression – to

name a few. It may be difficult to monetise some of

these non-tangibles. That government jobs retain

their charm is evident from the increasing number of

qualified candidates per advertised vacancy as well

as from the low turnover rates among recent recruits.

Government pay vs. private pay – who wins and at what level?

Contractual appointments


Central Pay Com-mission (CPC)

Min. Salary (Rs)

Max. Salary (Rs)

Compression Ratio (Max/Min salary)

Number of Pay Scales

I CPC (1946-47) 55 2000 01:36.4 150 -> 30

II CPC (1957-59) 80 3000 01:37.5 500 -> 140

III CPC (1972-73) 196 3500 01:17.9 500 -> 80

IV CPC (1983-86) 750 8000 01:10.7 153 -> 36

V CPC (1994-97) 2550 26000 01:10.2 51 -> 34

VI CPC (2006-08) 7000 80000 01:11.4 35 -> 19 [4 PBs with 15 GPs+ 4 distinct scales]

Source: 7th PC

Pay commission wise pay structure details

Per day PCU

Per mth. 3 PCU

P r i c e / Unit (Rs)

Expenses (Rs)

Rice/Wheat 475 gm 42.8 kg 25.9 1108

Dal (Toor/Urad/Moong) 80 gm 7.2 kg 97.8 704

Raw Vegetables 100 gm 9.0 kg 58.5 526

Green Vegetables 125 gm 11.3 kg 38.1 429

Other Vegetables 75 gm 6.8 kg 32.8 221

Fruits 120 gm 10.8 kg 64.2 693

Milk 200ml 18.0 litre 37.7 679

Sugar/Jaggery 56 gm 5.0 kg 37.4 188

Edible Oil 40 gm 3.6 kg 114.0 410

Fish 2.5 kg 268.4 671

Meat 5.0 kg 400.9 2005

Egg 90.0 no. 4.3 384

Detergents etc (Rs/month) 291.31 291

Clothing 5.5 meter 164.9 907

Total (1:14) 9218

Fuel, Electricity, Water Charges (20% of 17) 2305

Total (15) divided by 0.8 11522

Marriage, Recreation, Festivals, etc. (15% of 19)

2033

Total (17) divided by 0.85 13556

Provide for Skill (25% of 19) 3389

Sum (19+20) 16945

Housing (3% of 23) 524

Total (Divide 21 by 0.97) 17469

Add DA (3% of 23: DA is projected at 125% on 01.01.2016)

524

Final Minimum Pay as on 01.01.2016 (23+24) 17993

Rounding off 18000Source: 7th PC, PhillipCapital India Research

Calculation of Minimum Pay (AS ON 01.01.2016 BY THE COMMISSION)Methodology to determine the minimum pay

5th PC

Adopted a constant relative income ap-

proach based on growth in real minimum

income, in line with real per capita income

of the country, reflecting the inflation and

economic growth trends. Minimum wage

was set at Rs 2,440 on 1st January 1996.

6th PC

Adopted need-based wage, implying

wages should cover all the needs (food,

clothes, house/rent, fuel/electricity, addi-

tional expenses like education, medical

treatment, recreation, festivals and cere-

monies) of a worker’s family. Minimum was

fixed at Rs 7,000 per month as on 1st Jan-

uary 2006.

7th PC

Adopted need-based wage (same as 6th)

and arrived at a minimum wage of Rs

18,000 per month as on 1st January 2016.

This is almost 2.57 times of the minimum

wage recommended by the sixth pay com-

mission, implying that all scales will have

to be multiplied by this to arrive at sev-

enth pay commission levels – 2.25 times

for merging of basic pay with DA (assumed

at 125%) and 0.32 times reflecting the real

increase of 14.2% (2.57/2.25 = 1.1429).

Pay commissions have consistently at-

tempted to reduce the number of employ-

ment scales in the government’s hierarchy.

The sixth pay commission saw a marginal

increase in the compression ratio (which is

the maximum salary drawn by the secre-

tary to the government vs. minimum sal-

ary drawn by the lowest functionary in the

government).


Sour

ce: C

ompa

ny, P

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pCap

ital I

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Res

earc

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Things that the commission/commissions have achieved so far____________________________________________________________________________

REDUCTION IN NUMBER OF PAY SCALES____________________________________________________________________________

REDUCTION IN COMPRESSION RATIO____________________________________________________________________________

ANNUAL INCREMENT IN PERCENTAGE TERMS RATHER THAN A FIXED AMOUNT____________________________________________________________________________

ELIMINATION OF GROUP D AND SHIFTING OF EMPLOYEES TO GROUP C AFTER APPROPRIATE TRAINING____________________________________________________________________________

Current pay bands (based on 6th PC) comprises of 19 grades (reduced from 35 in the

5th) – four pay bands (with 15 levels of grade pay) along with four higher scales of HAG,

HAG+, apex, and cabinet-secretary rank.

Pay Band 1 (5200-20200)

Grade Pay 1800 1900 2000 2400 2800

Pay Band 2 (9300-34800)

Grade Pay 4200 4600 4800 5400

Pay Band 3 (15600-39100)

Grade Pay 5400 6600 7600

Pay Band 4 (37400-67000)

Grade Pay 8700 8900 10000

HAG (67000-79000) ; HAG+ (75500-80000) ; Apex 80000 (fixed) ; Cabinet Secretary 90000 (fixed)

Source: 7th PC

Current pay structure

“Cuts in a few perks like LTA are unwelcome”

– GV survey respondent


In the past commissions, private final consump-

tion expenditure (PFCE) responded positively

to higher government salaries – sometimes

with a lag, sometimes immediately. In the

6th, it picked up after a lag of two years (to 9.3%

in FY12 from 7.4% in FY10). During the 5th, the

impact was immediate – felt in FY97 when PFCE

growth picked up to 7.8% from 6% in FY96. How-

ever, after rising, PFCE almost always took a dip

in a few years – indicating a similar pattern could

play out after FY18.

A much needed stimulus for the economy

PA Y C O M M I S S I O N S A N D C O N S U M P T I O N

Clothing

Spending on clothes and footwear moved up with

a lag of one year during the 5th, while it registered

usual growth in the sixth. Overall share of clothing in

PFCE is trending higher (8.4% currently).

Fuel and power

Fuel consumption increased substantially during the

5th (with a lag of one year) while the impact was pos-

itive but not all that sharp during the 6th. This is con-

sistent with the rise in automobile sales after a pay

commission reward, along with higher usage of the

existing ones.

Furniture, furnishings, and household appliances

Spending on this segment has been rising in general

and received a boost during both commissions, espe-

cially during the 6th.

Personal care and personal goods

Increased during both 5th and 6th.

Transport and communication

This saw a sharp increase in its role in the total con-

sumption basket during the 5th – rose to 14.4% of

PFCE in FY98-99 from 13.7% in FY96. It remained sta-

ble during the 6th.

Rent

No change during the 5th, marginally better during

the 6th. Share of rent in total consumption is declin-

ing – currently at 6.7%.

Health services

Spending on health increased during the 5th; no sig-

nificant response in the sixth.

Education

Share (in consumption basket) as well as pace of

growth picked up during the 5th. The 6th PC did not

have any positive impact.

Two-wheelers

Growth picked up with a lag of one year during the

5th (11% yoy growth in FY99-00) and with a two-year

lag after the 6th (+26% in FY10, +26% in FY11, and

Here is a look at how various sectors were affected

(within PFCE) during the past two pay commissions:

Food

In general, this segment’s share in the total con-

sumption basket is coming off. It currently stands at

30.5% from 35% five years ago and 40% ten years

ago. There is not much consistency in the impact of

pay commissions on food consumption, in general

there was a positive influence – during the 5th it

rose, fell, and rose again (before which its share was

consistently falling). During the 6th, it increased in

FY08, but its overall share in consumption contin-

ued to fall.

Private final consumption expenditure (% of GDP, growth)

Sour

ce: R

BI, P

hilli

pCap

ital I

ndia

Res

earc

h


5TH pay commission 6TH pay commission

Food Up, to stable Up, to stable

Clothing Up, with a lag of one year No change

Rent No change Marginal increase

Fuel and power Sharp increase Increase

Furniture Increased Sharp increase

Health Increased Stable to higher

Transport Sharp increase Stable to higher

Education Sharp increase Stable to lower

Personal care Increase Increase

Two wheeler Sharp increase Sharp increase

Motorcycle Sharp increase Sharp increase

Scooters Insignificant Sharp increase

Cars Increase Sharp increaseSource: PhillipCapital India Research

Impact of 5TH and 6TH pay commission

“Gaadi tho hai, ab property lena hai (Have a car, want to now buy property)” – GV survey respondent survey

PFCE (Food)

+14% in FY12). Sales growth in motorcycles was

sharper (+27% in the 5th, +24% in the 6th). While

scooter sales growth was insignificant during the 4th,

it shot up during the 6th.

Passenger cars: Car sales picked up with a lag of two

years in FY00, but by a whopping 60%. Impact was

more substantial during the 6th PC, although with a

lag of two years. Growth picked up to 25%/29% in

FY10/FY11.

PFCE (Fuel)

PFCE (Transport)

PFCE (Clothing)


Sour

ce: C

EIC,

SIA

M, P

hilli

pCap

ital I

ndia

Res

earc

h

PFCE (Rent) PFCE (Furniture)

PFCE (Medical care) PFCE (Recreation, education)

Two-wheeler sales growth (yoy,%) Passenger car sales (unit, growth)


____________________________________________

MOST PEOPLE WILL BE SPENDING MORE ____________________________________________

SAVINGS WILL ALSO GET A PUSH

– 36% OF RESPONDENTS.____________________________________________

MOST (ESPECIALLY MID TO SENIOR) WILL PREFER INVESTING IN REAL ESTATE

– 74% OF THE RESPONDENTS.____________________________________________

A FEW SAID THAT THEY WOULD INVEST IN MU-TUAL FUNDS

– 14% OF THE RESPONDENTS.____________________________________________

EDUCATION SPENDING WILL RISE

– 26% OF THE RESPONDENTS SAID THEY WOULD USE THE EXTRA INCOME FOR THEIR KIDS’ EDUCATION. ____________________________________________

LARGELY LOWER-SEGMENT EMPLOYEES SAID THEY WOULD CONSIDER BUYING CONSUMER DURABLES (REFRIGERATORS, LED TV, ACS)

– 6-10% OF RESPONDENTS. ____________________________________________

MOST EMPLOYEES ALREADY OWNED CARS. ONLY FEW SAID THEY WOULD BUY NEW ONES

– 10% OF THE RESPONDENTS.

____________________________________________

PLANS TO SPEND ON JEWELLERY WERE MUTED

– ONLY 10% OF THE RESPONDENTS. ____________________________________________

A FEW SAID THE HIKE THIS TIME WAS NOT SUBSTANTIAL, THUS ONLY SMALL-TICKET SPENDING IS LIKELY. MOST SEEMED UNHAP-PY WITH THE QUANTUM OF THE HIKE

– AVERAGE EXPECTATIONS

RANGED FROM 25% TO 35%. ____________________________________________

MANY OF THESE EMPLOYEES SAID THEY BOUGHT CARS, TWO-WHEELERS, AND OTHER CONSUMER DURABLES WHEN THE SIXTH PAY COMMISSION WAS IMPLEMENTED.____________________________________________

Real estate will be the key beneficiary

G V S U R V E Y

GV Survey: Sector-wise spending preference of government employees (% of total respondents)

GV surveyed employees of various central departments across cities and designations. The conclusions are as follows:


Along with the pressures of pay com-

mission and finance commission

(lower share of the centre in the

tax pool), the government also has

FRBM targets to achieve. Since the 7th PC re-

port has been submitted on time, it will warrant

lesser arrears (unlike the 5th and 6th). Hence,

it should have a limited impact on government

finances vis-a-vis the previous commissions.

However, the PAP-GDP (pay-allowance-pension)

ratio is bound to rise. The objective was to keep

the PAP-GDP ratio lower than that of 6th PC,

Healthy stress for now

7 T H P C A N D T H E F I S C A L

which was at 0.77% excluding arrears (in 2009-

10). The 7th PC recommendations will result

in an extra spending of Rs 1tn (0.65% of GDP,

0.46% excluding railways). Due to the increase

in salaries because of the 7th PC, proportion of

salaries as a percentage of revenue expenditure

will rise by 4.25% vs. a 4.32% rise in the 6th PC.

Assumptions:

• For FY17, real GDP growth of 7.5% and infla-

tion at 4%

Ratios (%) 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

Pay and Allowances/ GDP 2.05 2.47 2.03 1.94 1.92 1.87 1.88 1.86 2.28

Pensions/GDP 0.84 1.2 1 0.94 0.95 0.92 0.92 0.91 1.12

PAP/GDP 2.89 3.67 3.04 2.87 2.86 2.79 2.81 2.77 3.4

Increase in PAP/ GDP 0.77 0.65

PAP/GDP (Excluding Railways) 2.03 2.65 2.22 2.1 2.1 2.03 2.04 2.02 2.41

Increase in PAP/ GDP 0.62 0.46

PAP/RE (Excluding Railways) 14.12 18.44 16.24 16.17 16.88 16.8 17.2 18.51 22.32

Increase in PAP/RE 4.32 4.25

Source: 7th PC, PhillipCapital India Research

Impact of 6th CPC and 7th CPC Awards on Macro-fiscal Statement (BASED ON NEW GDP METHODOLOGY)

“There is no fiscal space available to increase the share of the total spending on PAP (pay, allowances, and pension) other than that afforded by GDP growth. The share of PAP in total revenue expenditure will, at best, stay constant over the medium term.”– 7th PC


Central government fiscal deficit

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Tax revenue and pay commissions

Is there evidence of a rise in income tax reve-

nues as government salaries increased under pay

commissions? Based on the analysis of the last

two pay commissions (5th and 6th), tax revenue

increase was negligible when the commissions

were implemented, but there was improvement

after a lag of one year. Some other noteworthy

points:

• Coincidentally, the last two commissions have

been implemented during times of recession

(1997-98 – East Asian crisis and 2008-10 – finan-

cial crisis). Therefore, it is difficult to confidently

conclude the exact impact – income tax collec-

tion would have increased for the government

employees, but fallen for the rest due to the im-

pact of the crisis.

• Total government employees strength is 4mn

(only 11% of the 35mn total taxpayers in India).

Thus, an increase in the tax payment by these

employees will not stand out much.

10-year bond yield

Gross government borrowing (Rs Bn)

Income tax revenue

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The positive impact on income tax due to pay commissions

is insignificant (limited strength of central government em-

ployees within total tax payers in India), which results in

higher fiscal deficit. Higher fiscal deficit is funded by high-

er internal borrowing – therefore, gross market borrowings

by the government rise. These borrowings increased to Rs

838bn in FY99 from Rs 279bn in FY97 (fifth pay commis-

sion) and to Rs 4.5tn in FY10 from Rs 1.7tn in FY08 (impact

of sixth pay commission). Some of this increase can be at-

tributed to the fiscal stimulus that the government had to

dole out because of the financial crisis. Average 10-year

bond yield was at 7.91% in FY08 – it fell to 7.6% in FY09

and 7.2% in FY10. The fall was muted despite a 225bps cut

in repo rate and 200bps cut in CRR – reflecting the impact

of higher borrowing.

Fiscal deficit for FY16 is likely to hover around the budg-

eted target of 3.9% of GDP. Direct taxes have been lower

than budgeted by the government due to poor employ-

ment generation, salary hikes, and corporate profitability.

Within indirect taxes, customs and service tax collections

should be in line with the budgeted estimates while ex-

cise duty collection is likely to significantly surpass tar-

gets (higher excise duty on petroleum products – in FY16

the government increased excise duty on petrol/diesel

by Rs 4.1/6.6; in FY15 by Rs 8/6.7; total excise duty cur-

rently is Rs 20.5/15.8). In fact, lower crude oil prices have

made it possible for the government to achieve its FY16

fiscal target. Without this, due to slippage in other taxes

and disinvestment, the government would have found it

difficult to achieve its fiscal deficit target or to stay on

course in terms of capital spending. The latter is believed

to be the only positive contributor to capex in India now,

as the private sector grapples with poor demand and ex-

cess capacity.

The FY16 fiscal deficit target will be met with a small

reduction in capital spending, subsidies (food and fer-

Pay commission and fiscal impact: Analysis for FY16 and FY17

tiliser), and higher excise duty on petroleum products.

If excise duty on oil products cannot be raised further,

other expenditure will have to be shelved in order to

achieve the target. There is additional pressure on fiscal

deficit (impact of -10bps) because nominal GDP growth

has been lower than what was assumed during the

budget (at 8% vs. budgeted 11.5%). This implies that in

order to achieve the fiscal deficit target as percentage of

GDP, absolute value of the fiscal deficit will have to be

lower to the same extent. Additionally, there is a shortfall

from disinvestment. We expect the government to stay

focused on FY16 fiscal deficit as a percentage of GDP

– absolute value at Rs 5.38tn vs. budgeted Rs 5.55tn –

while allowing FY17 fiscal deficit estimate (3.5%, set ear-

lier under FRBM) to slip.

When the NDA government came into power in

May 2014 and presented its first budget in July 2014

(for FY15), it retained focus on fiscal consolidation (in

line with the UPA government). The government could

have chosen to revive growth by giving fiscal stimulus

as growth was dwindling, but it didn’t do so. Prior to

the budget announcement, fiscal deficit for FY15 was

expected to be 4.5% of GDP (Click here)(vs. 4.6% in

FY14) – however, the government chose to follow the

path of fiscal consolidation by budgeting a fiscal deficit

at 4.1% – at the cost of economic growth. It would have

been possible to alter the prior government’s strategy

of fiscal consolidation for at least a few years – the rat-

ing agencies would have been forgiving (considering the

magnitude of positive expectations from India led by PM

Modi). Alas – this did not come to pass.

A year later, when the government announced its FY16

budget, it revealed some delays in the path of fiscal con-

solidation (a year’s delay in achieving 3% deficit – target

shifted to FY18 from FY17). FY16 target was set at 3.9%,

FY17 at 3.5%, and FY18 at 3%. to support economic

growth along with implementation of the 14th finance

commission, which would provide more funds to states.

The finance minister, Mr Arun Jaitley, will present the

Union budget for FY17 on 29th February 2016. The

background to the budget is weakening domestic growth

(not stabilising), worsening global growth (along with par-

tial stimulus reversal), low commodity prices, negative in-

vestor sentiments, and the seventh pay commission. This

warrants more focus on spending even as tax revenue

growth moderates – implying higher fiscal deficit.


Rs Bn YoY % of GDP

FY15 FY16BE FY16PCE FY17PCE FY15 FY16BE FY16PCE FY17PCE FY15 FY16BE FY16PCE FY17PCE

Gross Tax Revenue 12514 14495 14877 17216 8.0% 15.8% 18.9% 15.7% 9.9% 10.3% 10.9% 11.4%

Direct Tax 7056 7980 7560 8257 10.9% 13.1% 7.1% 0.0% 5.6% 5.7% 5.5% 5.5%

Personal Income Tax 2786 3274 2900 3132 15.3% 17.5% 4.1% 8.0% 2.2% 2.3% 2.1% 2.1%

Corporation Tax 4261 4706 4650 5115 8.2% 10.5% 9.1% 10.0% 3.4% 3.3% 3.4% 3.4%

Indirect tax 5423 6479 7283 8959 4.4% 19.5% 34.3% 0.0% 4.3% 4.6% 5.3% 5.9%

Excise Duty 1855 2298 3100 3875 3.3% 23.9% 67.1% 25.0% 1.5% 1.6% 2.3% 2.6%

Customs Duty 1887 2083 2083 2312 7.8% 10.4% 10.4% 11.0% 1.5% 1.5% 1.5% 1.5%

Service Tax 1681 2098 2100 2772 1.9% 24.8% 24.9% 32.0% 1.3% 1.5% 1.5% 1.8%

Source: Budget documents, PhillipCapital India Research

Three scenarios can play out. The government

could:

1. Retain focus on fiscal consolidation and lower

developmental spend – implying fiscal deficit tar-

get of 3.5-3.6%.

2. Take a balancing approach towards fiscal con-

straints and developmental spend – implying fiscal

deficit target of 3.8-3.9%.

3. Focus on developmental spend and econom-

ic growth revival – implying fiscal deficit target of

4.1-4.2%.

Scenario 2 is the most likely, as scenario #1 will

be detrimental to growth and scenario 3 will at-

tract negative attention from rating agencies, as

they will perceive sharp slippage in fiscal deficit

along with slowing economic growth as risky.

We believe that India is in a comfortable posi-

tion considering that Indian GDP growth at 7%

is still amongst the best across the globe.

For FY17, fiscal deficit is likely to slip to 3.8% of

GDP based on the following assumptions:

• Nominal GDP growth at 10.6%, real GDP

(Rs bn) YoY Growth (%) % of GDP

Budget statistics FY15 FY16BE FY16PC FY17PC

FY15 FY16BE

FY16PC

FY17PC

FY15 FY16BE

FY16PC

FY17PC

Nominal GDP 126538 141089 136661 151201 11.4 11.5 8.0 10.6

Revenue receipts 11263 11416 11667 13220 9.4 1.4 3.6 13.3 8.9 8.1 8.5 8.7

Tax (net) 9085 9198 9450 10958 8.7 1.3 4.0 16.0 7.2 6.5 6.9 7.2

Non - tax 2178 2217 2217 2261 12.7 1.8 1.8 2.0 1.7 1.6 1.6 1.5

Capital receipts 5549 6357 5863 6174 -1.1 14.6 5.7 5.3 4.4 4.5 4.3 4.1

Recovery of loans 109 108 108 108 0.8 -1.2 -0.8 0.0 0.1 0.1 0.1 0.1

Other reciepts (mainly PSU disinvestment) 314 695 200 300 21.3 121.7 -36.2 50.0 0.2 0.5 0.1 0.2

Borrowings and other liabilities 5126 5555 5555 5766 -2.3 8.4 8.4 3.8 4.1 3.9 4.1 3.8

Total receipts 16812 17773 17529 19393 5.7 5.7 4.3 10.6 13.3 12.6 12.8 12.8

Non-plan expenditure 12132 13123 12707 14293 8.8 8.2 4.7 12.5 9.6 9.3 9.3 9.5

Revenue A/c 11219 12060 11706 13193 9.2 7.5 4.3 12.7 8.9 8.5 8.6 8.7

Interest payments 4114 4561 4561 4949 8.2 10.9 10.9 8.5 3.3 3.2 3.3 3.3

Defence 1404 1521 1521 1650 12.5 8.4 8.3 8.5 1.1 1.1 1.1 1.1

Subsidies 2667 2438 2084 2194 4.4 -8.6 -21.9 5.3 2.1 1.7 1.5 1.5

Food 1227 1244 1000 1244 33.3 1.4 -18.5 24.4 1.0 0.9 0.7 0.8

Fertilisers 710 730 670 650 4.4 2.8 -5.6 -3.0 0.6 0.5 0.5 0.4

Petroleum 603 300 250 150 -29.5 -50.2 -58.5 -40.0 0.5 0.2 0.2 0.1

Others 128 164 164 150 27.0 28.5 28.3 -8.5 0.1 0.1 0.1 0.1

Capital A/c 913 1062 1000 1100 4.7 16.3 9.5 10.0 0.7 0.8 0.7 0.7

Plan expenditure 4679 4650 4650 5100 -1.6 -0.6 -0.6 9.7 3.7 3.3 3.4 3.4

Revenue A/c 3669 3300 3300 3500 -1.3 -10.0 -10.1 6.1 2.9 2.3 2.4 2.3

Capital A/c 1011 1353 1350 1600 -2.5 33.9 33.6 18.5 0.8 1.0 1.0 1.1

Total revenue expenditure 14888 15360 15006 16693 6.4 3.2 0.8 11.2 11.8 10.9 11.0 11.0

Total capital expenditure 1924 2414 2350 2700 0.8 25.5 22.2 14.9 1.5 1.7 1.7 1.8

Total expenditure 16812 17773 17357 19393 5.7 5.7 3.2 11.7 13.3 12.6 12.7 12.8

Fiscal deficit 5126 5555 5382 5766 -2.3 8.4 5.0 7.1 4.1 3.9 3.9 3.8

Revenue deficit 3625 3945 3339 3474 -2.1 8.8 -7.9 4.0 2.9 2.8 2.4 2.3

Primary deficit 1013 993 821 816 -29.9 -1.9 -19.0 -0.5 0.8 0.7 0.6 0.5


Budget statistics of the central government


Rs Bn YoY % of GDP

FY15 FY16BE FY16PCE FY17PCE FY15 FY16BE FY16PCE FY17PCE FY15 FY16BE FY16PCE FY17PCE

Gross Tax Revenue 12514 14495 14877 17216 8.0% 15.8% 18.9% 15.7% 9.9% 10.3% 10.9% 11.4%

Direct Tax 7056 7980 7560 8257 10.9% 13.1% 7.1% 0.0% 5.6% 5.7% 5.5% 5.5%

Personal Income Tax 2786 3274 2900 3132 15.3% 17.5% 4.1% 8.0% 2.2% 2.3% 2.1% 2.1%

Corporation Tax 4261 4706 4650 5115 8.2% 10.5% 9.1% 10.0% 3.4% 3.3% 3.4% 3.4%

Indirect tax 5423 6479 7283 8959 4.4% 19.5% 34.3% 0.0% 4.3% 4.6% 5.3% 5.9%

Excise Duty 1855 2298 3100 3875 3.3% 23.9% 67.1% 25.0% 1.5% 1.6% 2.3% 2.6%

Customs Duty 1887 2083 2083 2312 7.8% 10.4% 10.4% 11.0% 1.5% 1.5% 1.5% 1.5%

Service Tax 1681 2098 2100 2772 1.9% 24.8% 24.9% 32.0% 1.3% 1.5% 1.5% 1.8%


growth at 7.5%.

• In order to align with the future GST rates, service

tax rate will be raised – this will support tax revenue

along with higher excise duty on petrol and diesel.

• Disinvestment of Rs 300bn

• Additional payout of Rs 700bn under the ‘salaries’

head – impact of seventh pay commission. Here, the

assumption is that the balance amount of Rs 300bn

will be postponed to next year or some reduction in

payout will happen due to partial acceptance of the

pay commission recommendations (which is the buzz).

• Subsidy outgo at 1.5% of GDP, similar to FY16. Av-

Gross tax revenue of the central government

erage crude oil price assumed at US$ 40 per

barrel.

• Capital spending orientation to persist –

capital expenditure growth assumed at 15%

vs. 22% in FY16.

• Focus on defence sector also expected to

persist in FY17.

Higher fiscal deficit will lead to higher government

borrowing and put pressure on bond yields as well

as dissuade RBI from monetary policy easing. In

the absence of further rate reductions, higher bor-

rowing yields will be a deterrent for growth revival.

Centre’s capital expenditure

Based on 5th and 6th PC analysis, capital expend-

iture stayed on course during the years of reward.

Currently, continuation in capital spending boost

is much needed for the economy, thus it is likely

that the government will increase capex budget by

10-12% (if not more, vs. 34% in FY16) along with

meeting the pay commission obligation.

• 5th PC – Plan capital expenditure of the centre

rose by 9% in FY98 and 10% in FY99 from 26%

in FY97 (stayed at 1.5% of GDP).

• 6th PC – Plan capital expenditure stayed

strong in FY09-12 – (+27% In FY09, +26% in

FY10, +28% in FY11) – (0.7%/0.8%/0.8% of

GDP).

Capital expenditure of central government

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Impact of pay commission on state finances generally lasts at least for two-years and

typically for much longer (4-5 years). FRBM targets have enabled a contained fiscal

deficit for states. Most states follow recommendations of central pay commissions

(thus, average salary hike should be in the range of 10-14%; PAP hike at 18-24%).

Consolidated revenue deficit of all the states is at 0.4% in FY15. Similar trends are

expected in FY16 as well due to higher allocation of taxes to states. Combined state

revenues as a percentage of gross state domestic product (GSDP), have been stable

at 7.7% for last three years. Financially-weak states have already been given higher

funds (recommended by 14th finance commission), which should help them in bal-

ancing fiscal deficit along with sensibly distributing/allocating salary hike based on

individual state’s capacity and not necessarily following the centre’s pay commission

recommendations.

States and pay commission

State-wise revenue deficit as a % of GSDP

States 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 (RE)

2015-16 (BE)

Andhra Pradesh 0.0 -0.2 -0.3 -0.4 -0.5 -0.2 -0.04 2.7 1.3

Bihar -4.1 -3.1 -1.8 -3.1 -1.9 -1.7 -1.8 1.1 2.6

Chhattisgarh -3.8 -1.9 -0.9 -2.8 -2.3 -1.6 0.4 -1.1 -1.8

Goa -0.8 -0.4 0.4 -2 -0.7 0.5 0.7 -0.1 -0.8

Gujarat -0.7 0 1.6 1 -0.5 -0.8 -0.6 -0.7 -0.7

Haryana -1.5 1.1 1.9 1.1 0.5 1.3 1 2.1 1.8

Jharkhand 1.8 -0.7 -2.6 -0.7 -1.1 -0.9 -1.6 -1.9 -2.1

Karnataka -1.4 -0.5 -0.5 -1 -1 -0.4 -0.1 0 -0.1

Kerala 2.2 1.8 2.2 1.4 2.6 2.7 2.8 2.1 1.4

Madhya Pradesh -3.2 -2.1 -2.4 -2.6 -3.2 -2.1 -1.4 -1.2 -1.0

Maharashtra -2.2 -0.7 0.9 0.1 0.2 0.3 -0.3 -0.8 -0.2

Orissa -3.3 -2.3 -0.7 -2 -2.5 -2.3 -1.2 -1.1 -1.5

Punjab 2.5 2.2 2.7 2.3 2.7 2.6 2.1 1.8 1.6

Rajasthan -0.8 0.4 1.8 -0.3 -0.8 -0.8 0.2 0.7 -0.1

Tamil Nadu -1.3 -0.4 0.7 0.5 -0.2 -0.2 -0.2 -0.4 -0.4

Uttar Pradesh -0.9 -0.4 -1.3 -0.6 -1.0 -0.7 -1.1 -3.3 -3.2

West Bengal 2.7 4.3 5.4 3.7 2.8 2.3 2.7 1.3 0Source: IIM paper, PhillipCapital India Research

“Government service is not a contract. It is a status. The employees expect fair treatment from the government. The states should play role models for services.”

– 7th PC


The combined state fiscal deficit shot up substantially

during the fifth pay commission and lasted for a few

years. The impact was felt in FY99, when fiscal deficit

(as % of GDP) rose to 4.1% from 2.8% in FY98. This

continued until FY04-05, when fiscal deficit ranged at

4.3% of GDP. Revenue deficit for states also shot up

substantially for the same reason – it rose to as high

as 2.6% in FY02 (from 1.1% in FY98) and stayed high

at 2.2% until FY04. Therefore, in case of states, the

impact lasts longer.

During the sixth pay commission, fiscal deficit rose

to 2.4% in FY09 from 1.5% in FY08 and has stayed

high since then. A part of the reason why fiscal deficit

is high in the last few years is the general economic

slowdown. Revenue deficit was in surplus (+0.23%) in

FY09 and fell to deficit (-0.5%), but has turned into

surplus since then – this means that the impact of

sixth pay commission on revenue deficit was not very

substantial. Similarly, we do not expect the impact of

seventh pay commission to last for long.

States’ capital expenditure – This remained strong

during the fifth pay commission but dwindled when

the sixth pay commission was implemented, partially

due to the economic slowdown.

State fiscal deficit and capital expenditure

State fiscal deficit

State revenue deficit

State capital expenditure

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While the common belief is

that the increase in income

from pay commissions is

largely consumed, empirical

evidence suggests that higher salaries also

lead to higher savings (about a 2% rise in

savings rate). The last two pay commissions

led to a structural rise in the household sav-

ings rate – during the 6th PC (FY09), the rate

increased to 24% (from 23% in FY08) and

further to 25% in FY10. It has been declining

since then – according to the latest available

data (which is FY13) it is 22%. During the

5th PC (savings rate/GDP surged to 18.1%

from 15.8% in FY97, continued to rise to

22% in FY00; yoy growth of 27%/24%/25%

in FY98/99/00).

Higher savings should also boost invest-

ments – this manifested after both the 5th

and 6th PCs. GFCF rose in FY98-00 at an

annual rate of 9% (up from 22.7% of GDP in

FY97 to 23.8%/24.5%/24.4% in FY98/99/00).

6th PC impact was felt in FY11-12 when

GFCF rose at an annual rate of 12% – from

33.3% of GDP in FY10 to 33.5% in FY11 and

35.3% in FY12.

Impact on inflation

There is a belief that higher spending should

be inflationary. However, there are no signs

of any correlation between pay commission

salaries and higher demand leading to high-

er inflation (in both WPI and CPI). Rise in in-

flation that happened around this time was

due to higher food inflation because of poor

agriculture output.

Impact on GDP

Higher private consumption, government

spending, and private investment contrib-

Positive impact on savings, investments, and GDP

7 T H P C A N D M A C R O V A R I A B L E S

Household Savings

Gross Fixed Capital Formation

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ute positively to GDP (GDP = C + I + G) – to

that extent, theoretically, the impact on GDP

is positive. However, actual GDP growth rate

at the time of previous pay commissions did

not rise significantly, as other factors such as

agriculture output and external sectors were

not supportive.


7th PC impact on macro variables

We expect private final consumption expenditure

to rise with the 7th PC reward of Rs 700-1000 bn

Assuming an income tax rate of 20%, disposable

income in the hands of the government employ-

ees will be at Rs 560-800bn. A savings rate of 30%

implies that Rs 400-560bn will be available for con-

sumption/investment. This is about 0.26-0.37% of

FY17 GDP – and is likely to be the extent of the 7th

pay commission’s positive contribution to GDP.

Real GDP at market price (growth rate, yoy)

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Rs Bn Scenario I

ScenarioII

Scenario III

Seventh pay commission reward

500 700 1000

Income tax rate at 20% 100 140 200

Disposable income 400 560 800

Savings at 30% 120 168 240

Net income available for consumption/investment

280 392 560

As % of GDP 0.19 0.26 0.37

Source: PhillipCapital India Research

7th PC impact on savings and GDP

Higher fiscal deficit for the centre in FY17_____________________________________No significant positive impact on tax revenueHigher government borrowing; higher cost of borrowing assuming no more rate cuts from RBI______________________________________Since it lasts longer in case of states, risk of capital spending by the states takes a back seat ______________________________________PFCE should rise mostly in FY17-18______________________________________Savings will increase followed by resultant positive impact on investment, through higher credit availability with the banks ____________________________________ Positive impact on GDP______________________________________No impact on inflation____________________________________ Sectors expected to be positively impacted – real estate (significant), consumer durables and cars (marginal)____________________________________

Effect of the 7th PC

“Government should inspire confidence in the minds of civil servants - that they will not be hounded by unnecessary harassment by investigation agencies. The recent trend of hounding civil servants like criminals for the failure of bona-fide decisions is not a happy one. This will discourage the bureaucracy from taking bold decisions for fear of being hounded if such a decision misfires. Any misadventure should not be looked upon with suspicion unless definite criminal intent (to benefit self or someone else) is present. If this trend is not checked, it will lead to disastrous consequences.” – 7th PC


Fifth PC 185 ` Bn 31% increase

Sixth PC 260 ` Bn 54% increase

Seventh PC 1000 ` Bn 14.3% increase

FIFTH PC SIXTH PC SEVENTH PC

Implemented FY97-FY99 FY09-FY11 FY17-FY18

Amount Rs Bn 185 260 1000

% of GDP % 1% 0.77% 0.65%

Centre Fiscal deficit % FY99 - 6.3%, FY97 - 4.7% FY10 - 6.4%, FY08 - 2.9% FY17E - 3.8%, FY16E, 3.9%

State fiscal deficit % FY00 - 4.5%, FY98 - 2.8% FY10 - 2.9%, FY08 - 1.5% —

Plan Capital expenditure High High Our FY17 estimate: 19% growth

State Capital expenditure High High-stable High-stable

Tax revenue No impact No impact No impact

Gross borrowing Rs Bn FY99 - 838bn, FY97 - 279bn FY10 - 4510bn, FY08 - 1681bn Our FY17 estimate: 6.6bn

PFCE % of GDP

FY97 - 7.8%, FY96 - 6% FY12 - 9.3%, FY10 - 7.4% Our FY17E: 8-9%

Lag Immediate 2-years —

HH Savings % of GDP FY98 - 18%, FY97 - 15.8% FY10 - 25%, FY08 - 22.4% Our FY17 estimte: 23%

Inflation No impact No impact No impact

GDP Positive Positive Positive (0.37%)Source: RBI, CSO, 7th PC, budget documents, PhillipCapital India Research

Summary of impact of 5th and 6th PC; likely impact of 7th PC

To conclude, the pay commission will be an over-

all stimulus – on a more immediate basis for con-

sumption and GDP, and with a lag for savings and

investment. Demand for consumer durables (such

as cars and motorcycles) should rise, although not

as significantly as during earlier pay commissions.

GV’s survey indicates a much more profound im-

pact on the real estate sector (which is reeling

under pressure for many years and is widely ex-

pected to continue doing so). Some positive im-

pact should be felt due to the demand emerging

from the central government employees. Trailing

implementation by states implies that positive

growth momentum will keep rolling. Private con-

sumption will inch higher across segments. While

PSU companies generally tend to follow pay

commission recommendations, the magnitude

depends on their profitability. Salary revisions are

based on labour demands and companies have

succeeded in offering lower pay revisions (than

recommended).

Of course, the fiscal deficit will turn adverse for

a few years and hurt the developmental spend-

ing (centre and state). It will hurt the capital ex-

penditure cycle, especially at a time when pri-

vate sector is sitting on excess capacity and poor

demand. Help can come from higher consumer

demand leading to better capacity utilisation

and higher capital expenditure by the private

sector – sooner rather than later. Higher fiscal

deficit will lead to pressure on bond yields (they

may not fall substantially) and RBI will be con-

strained in reducing interest rates due to higher

fiscal deficit.

Higher private consumption, higher capacity uti-

lisation, fiscal slippage, and higher capex spend

by the government is an all-round stimulus that

India needs and should be a recipe for growth. A

round of applause for the 7th PC won’t be amiss.

Conclusion


In the light of sharply falling global dairy prices and to understand the impact on India’s market, GV talked to Mr Rupinder Singh Sodhi, the MD of Gujarat Cooperative Milk Marketing Federation, known for its iconic Amul brand. He shares his insights on not only India’s position in the global scenario but also on the challenges and opportunities for India’s dairy industry.

BY NAVEEN KULKARNI AND JUBIL JAIN

Milk-in-India: No child’s play!


Q. The FMCG market has slowed down consid-

erably. How do you see the Indian dairy market?

A. The Indian dairy market is more or less un-

changed in terms of growth. Consumption of milk

will grow in India. Per capita consumption of milk is

still quite low at around 310gm Volume growth for

base milk is around 4-5% and value-added prod-

ucts are growing at around 10%. The challenge

now is value growth, as milk prices have declined

both in the domestic and international markets.

Q. International milk prices have corrected con-

siderably. How is the domestic scenario panning

out, seeing as cooperatives dominate the market?

A. Domestic pricing scenario is quite depressed.

International prices impact prices in India, as milk

can be stored and transported in powdered for-

mats like skimmed milk powder. India produces

surplus milk and exports milk powder. International

prices for skimmed milk powder have declined to

around US$ 1800 per metric tonne from US$ 4500.

We are not able to export, so prices are correct-

ing here too. In India, skimmed milk powder prices

have declined to Rs 130 from Rs 270 per kg. This

is a drastic reduction, which is impacting farmers.

In some of the states, the situation is particularly

precarious – in Maharashtra, procurement prices

for milk have reduced to as low as Rs 15-16 per

litre from Rs 25-27 earlier. The situation in Mahar-

ashtra is particularly exacerbated because of lack

of a strong cooperative. In Gujarat, the situation is

much better because our procurement prices are

significantly higher.

Q. Do low prices of milk benefit anybody apart

from the consumers?

A. Generally low milk prices are not beneficial for an-

ybody in the long run. Even in Maharashtra, private

dairies have reduced their purchases significantly and

cooperatives have to buy 18-19% more milk. The

chief victims of low milk prices are animals, which are

not given enough feed because the cost vs. returns

are not favourable.

Q. In this tough pricing scenario, which coopera-

tives are doing well?

A. Karnataka (Nandini brand) is doing well because

government provides milk subsidy. Rajasthan, Punjab,

and Kerala also seem to be doing well. Maharashtra,

north UP, and some parts of Haryana are not doing

so well.

Q. You maintain that developing a business only

based on value-added products is a challenge.

Why is that the case in India?

A. Milk has two components – fat and SNF (solid non-

fat). Fat can be used for making butter or ghee but

SNF has to be sold separately. If one relies only on

value-added products, then the cost of these prod-

ucts will be very high because of supply-chain costs.

An ‘only value-added’ products model suffers from

the shortcomings of inability to generate sufficient

scale. Selling base milk provides the necessary scale

and the supply-chain leverage that can be exploited

to bring down costs.

Our cost structure is the leanest in India in spite of

having world-class factories and supply chain – be-

cause of the economies of scale. The problem with

an only value-added products model is getting the

desired quantity of milk for establishing the scale. The

problems outweigh benefits for such as model – at

least currently.

An ‘only value-added’ products model suffers from the shortcomings of inability to generate sufficient scale. The most critical component for success in the dairy industry is a super-efficient supply chain.

In Maharashtra, procurement prices for milk have reduced to as low as Rs 15-16 per litre from Rs 25-27

earlier. The situation in Maharashtra is particularly exacerbated because of lack of a strong cooperative


Q. Globally, companies like Kraft have built a

world class operation based on only doing val-

ue-added businesses like selling cheese. Why is

the Indian scenario different?

A. Firstly, for developed markets the consump-

tion of milk in the form of cheese is very high and

secondly, the market structure is dominated by

private dairy players. Hence, margins in the dairy

business are quite high. So selling only cheese can

be a lucrative business model because there are

economies of scale. In India, cheese is a very small

portion of the overall consumption.

Q. In India, Nestle has built a successful busi-

ness model selling value-added products. Can

this be replicated by some of the other product

categories?

A. Nestle has been in India even before the coop-

eratives. It is successful in infant nutrition because

of regulations. Apart from infant nutrition, it has

developed successful brands in dairy whitener

and condensed milk. Nestle has had an

early-mover advantage, which it has

capitalised, but new players trying

to sell only value-added prod-

ucts are struggling.

Q. What would be the most critical factors for

success in India’s dairy industry?

A. The most critical component for success in the

dairy industry is a super-efficient supply chain. For

example, we measure supply chain costs in paise

per litre – we have drilled down cost efficiencies

to that level. Secondly, dairy is a very sensitive

industry because of the large number of people

involved, especially the farmers. Farmers should

be happy and get good prices – this keeps the

ecosystem running smoothly, otherwise there will

be disruptions of all sorts. Rural incomes are de-

clining and animal feed is getting poorer, which

in turn impacts both quality and quantity – this

vicious cycle has to be avoided. Also, dairy is an

industry of scale – so one has to be a player with

a long-term focus. Organic growth, tapping the

right markets, owning your marketing channel,

and building brands will be the other components

for success.

Q. Do you see managing working capital as a

big challenge for the dairy industry?

A. GCMMF does not have any working capital

challenges. Our business is all cash-and-carry.

Even with institutional buyers, our terms are sim-

ilar. Therefore, we have not had working-capital

challenges. For other players this could be a chal-

lenge, especially if a large part of their sales are to

large institutions on difficult terms.

Q. Lastly, is Patanjali making inroads in the

dairy business too?

A. Patanjali is a strong brand and Baba Ramdev

has done a commendable job in growing the ghee

category, even though he sells the product at a

significant premium. We will see how the brand

grows, but its start has been promising.

The challenge now is value growth, as milk prices have declined both in the domestic and international markets.

Imag

e So

urce

: Am

ul Ta

aza

Milk


The last few years have been typical – the start of

the year was marked by optimism and hopes of

better GDP growth or corporate earnings, only to

spiral into consistent downward revisions through

the year. This year has been decidedly different

– it has begun on a note of great pessimism and

predictions of a cataclysmic year ahead have be-

come normal. However, doomsday-type predic-

tions have a limited history of success and the

chances of being surprised positively are rising.

Anticipating the probability of these surprises will

be a key factor for the success or failure of an eq-

uity portfolio. Ground View divines five possible

surprises for 2016 that could shape investor ex-

pectations and valuations.

PLAUSIBLE SURPRISES THAT COULD MAKE OR BREAK 2016

BY NAVEEN KULKARNI AND ANINDYA BHOWMIK


The first and quite likely is a revival in rural demand.

Two consecutive poor monsoons have impacted rural

demand, but rural demand responds quickly to chang-

ing economic scenarios and monsoons. Rainfall is likely

to be normal in CY16 and more likely to be better the

next year considering that La Nina will take a strong

hold. Of the last 14 El Nino, 11 have been followed by

La Nina. Apart from the prospects of a better monsoon,

the government is expected to announce substantial

packages to stoke rural demand. India’s largest state,

UP, with the biggest rural market, will face elections in

2017. After its surprising loss in Bihar elections late last

year, there is immense pressure on the ruling party to

consolidate its position in UP. The central government

has already emphasised project development in the

state – a further boost to rural demand will make UP a

big beneficiary. The upcoming budget will be crucial in

dictating the outlook for the rural market.

The second, with a coin-toss probability, is that con-

sensus corporate earnings estimates are beaten.

This seems to be the remotest possibility prima fa-

cie, but the likelihood of this happening is reason-

ably high. Consensus expects Sensex/Nifty earnings

to grow by 14% – even this looks high in the current

environment of pessimism, as last six years have been

disappointing. Nifty expectations were last beaten in

2010 – six consecutive years of underperformance

have led to tempered expectations. However, a gran-

ular analysis of the estimates suggests that 42% of

the universe’s constituents are highly likely to beat

top-down expectations, while 26% have a marginal

chance. This translates into a 55% chance of Nifty

beating estimates – slightly better than coin-toss at

this juncture!

Historical index heavyweights (Sun Pharma, Infosys,

Reliance, and Bharti) are likely to see a return to form

in FY17, ending a period of low capital productivi-

ty. They seem to have learnt from past mistakes and

their operating performances are becoming stronger.

A return of these big daddies will certainly provide a

backbone to Nifty earnings, while usual suspects like

PSU banks, cap goods, and commodities are likely to

continue facing headwinds year.

Likelihood of beating Nifty estimates

Oceanic Nino index

Sour

ce: P

hilli

pCap

ital I

ndia

Res

earc

h

Sour

ce: G

olde

n Ga

te W

eath

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ervi

ces

1. A revival in rural demand over the next 12 months

2. Results are better than consensus expectations


The 7th pay commission is round the corner, and a

significant portion of the new hike could be lever-

aged and channelled into creation of physical as-

sets, which will lead to a rise in private investment

activity. Corporate activity, based on a Bloomberg

survey of BSE 500 companies, is likely to decline by

20% in FY17 but FDI (likely to rise by 20%) could

make up for some of the losses. Put together (rise

in household GCFC and FDI), private sector capex

is not looking as bleak as portrayed even as gov-

ernment spending will see continued traction. The

growth in private capex could pick up by the end

of the year.

The third surprise could be an uptick in private capital

spending. Weak private investment environment, dom-

inated by stretched balance sheets and weak global

demand scenario, has been discussed at length. How-

ever, there is still a chance of a positive surprise from

this front – this is because private GFCF is made up of

capex by private companies and households – roughly

in an equal proportion – private household investments

account for around 30% of the total investment. While

slowing capex by private participants is a known prob-

lem (CAGR of 6% over the last two years), what is not

widely known is that household GFCF has been de-

clining at a compounded rate of 10% in the last two

years – 80% of household GFCF comes from real estate

construction. This could reverse this year – household

savings have been flattish for the last two years, but are

likely to have already risen in FY16. Households have

money and the scope for mortgage activity is abundant

as credit assistance is not a problem.

3. Private capital spending actually increases

Household spending, BSE 500 capital spending, FDI spending

Sour

ce: B

loom

berg

, Min

istry

of F

inan

ce, C

SO, P

hilli

pCap

ital I

ndia

Res

earc

hSo

urce

: Blo

ombe

rg, M

inist

ry o

f Fin

ance

, CSO

, Phi

llipC

apita

l Ind

ia R

esea

rch

Sour

ce: B

loom

berg

, Min

istry

of F

inan

ce, C

SO, P

hilli

pCap

ital I

ndia

Res

earc

hSo

urce

: Blo

ombe

rg, R

BI, P

hilli

pCap

ital I

ndia

Res

earc

h


The next, albeit less likely, surprise could be

in the form of credit growth picking up at a

faster pace. From, the latest data available,

credit growth, now at 11%, seems to be offer-

ing green-shoots – after staying at single digits

for a large part of 2015. The RBI and the finance

ministry have literally pushed the banking sector

into cleaning up its stressed assets by making it

provide adequately under stricter NPA norms.

Private banks such as Axis and ICICI have al-

ready taken hits on balance sheets to address

bad corporate debt piled up in their books. If

the asset-quality deterioration bottoms-out fast-

er, banks are likely to focus more on improving

credit growth. The low base formed in 2015 (for

credit growth), could lead to positive surprises

from quite a few banks.

The dollar has been strong and the current envi-

ronment portends that it will get stronger. However,

this is based on rates rising and the US economy

doing better than others. But the fact is, rate rises

projected by the US federal reserve are less like-

ly now. WSJ polls say there is a 17% chance for a

US recession in 2017 – the highest in the last five

years. Add to this rising political uncertainty and

weak markets – it could make a potent concoction.

Republican front runners Donald Trump and Ted

Cruz (the former playing the xenophobia card and

the latter playing his tax policies card – flat income

and sales tax and a monetary policy linked to gold)

are already making the markets wary. Democrat

candidate Hillary is not widely trusted. As an air of

political uncertainty brews, it is possible that the

dollar may not be looked at as such a safe haven

anymore. This could mean a significant change in

asset allocation for investors in India and more ‘in-

ward looking’. Non Food Credit growth yoy

Dollar index Vs USDINR

4. Credit growth defies current expectations

Sour

ce: R

BI

Sour

ce: B

loom

berg

5. Dollar weakens under political uncertainty


Indian Economy – Trend Indicators

Monthly Economic Indicators

Quarterly Economic Indicators

Growth Rates (%) Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15

IIP 5.2 3.6 2.8 4.8 2.5 3.0 2.5 4.2 4.3 6.3 3.8 9.9 -3.2

PMI 53.3 54.5 52.9 51.2 52.1 51.3 52.6 51.3 52.7 52.3 51.2 50.7 50.3 49.1

Core sector 8.5 2.4 1.8 1.4 -0.1 -0.4 4.4 3.0 1.1 2.6 3.2 3.2 -1.3

WPI -0.2 -0.5 -0.9 -2.1 -2.3 -2.4 -2.4 -2.4 -4.1 -4.9 -4.5 -3.8 -2.0 -0.7

CPI 4.4 5.0 5.2 5.4 5.3 4.9 5.0 5.4 3.7 3.7 4.4 5.0 5.4 5.6

Money Supply 12.3 11.7 11.1 10.0 11.5 11.4 11.3 11.0 11.3 11.1 11.3 10.9 11.3 11.2

Deposit 11.0 10.8 11.6 11.9 11.4 11.4 11.5 11.4 11.8 11.9 11.3 11.1 10.4 10.9

Credit 9.0 9.4 8.9 7.2 8.7 9.7 8.8 9.5 9.4 9.0 7.5 9.0 9.8 11.1

Exports 9.4 -0.9 -11.2 -15.0 -21.1 -14.0 -20.2 -15.8 -10.3 -20.7 -24.3 -17.5 -24.4 -14.7

Imports 26.5 -3.4 -11.4 -15.7 -13.4 -7.5 -16.5 -13.4 -10.3 -9.9 -25.4 -21.2 -30.3 -3.9

Trade deficit (USD Bn) -16.2 -9.2 -8.3 -6.8 -11.8 -11.0 -10.4 -10.8 -12.8 -12.5 -10.5 -9.8 -9.8 -11.7

Net FDI (USD Bn) 1.8 4.0 4.7 3.8 2.7 3.3 3.8 1.7 1.7 2.2 2.8 4.9 2.7

FII (USD Bn) 4.8 -0.4 6.6 3.8 2.0 3.1 -2.8 -2.0 -0.7 -3.5 -2.4 4.5 -3.8

ECB (USD Bn) 3.5 0.6 2.6 2.3 2.7 7.3 2.4 3.2 2.1 0.8 2.6 2.1 3.2 3.0

NRI Deposits (USD Bn) 62.0 63.0 61.9 61.8 62.5 63.4 63.8 63.7 64.1 66.5 65.6 65.3 66.7 0.0

Dollar-Rupee 316.3 319.7 327.9 338.1 341.4 344.6 352.5 355.2 353.3 355.4 350.0 353.6 351.6 352.1

FOREX Reserves (USD Bn) 295.8 291.9 293.4 296.4 287.9 284.6 280.2 275.5 276.3 283.0 291.3 295.7 292.2 294.4

Balance of Payment (USD Bn) Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16

Exports 81.2 79.8 83.7 81.7 85.3 79.0 70.8 68.0 67.6

Imports 114.5 112.9 114.3 116.3 123.9 118.3 102.5 102.2 105.0

Trade deficit -33.3 -33.2 -30.7 -34.6 -38.6 -39.3 -31.7 -34.2 -37.4

Net Invisibles 28.1 29.1 29.3 26.7 28.5 30.9 30.2 28.0 29.2

CAD -5.2 -4.1 -1.3 -7.9 -10.1 -8.4 -1.5 -6.1 -8.2

CAD (% of GDP) 1.2 0.9 0.3 1.6 2.0 1.7 0.3 1.2 1.6

Capital Account -4.8 23.8 9.2 19.2 16.5 23.6 30.7 18.1 7.2

BoP -10.4 19.1 7.1 11.2 6.9 13.2 30.1 11.4 -0.9

GDP and its Components (YoY, %) Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16

Agriculture & allied activities 3.6 3.8 4.4 2.6 2.1 (1.1) (1.4) 1.9 2.2

Industry 4.2 5.5 5.5 8.1 7.2 3.8 7.2 6.4 8.3

Mining & Quarrying 4.5 4.2 11.5 4.3 1.4 1.5 2.3 4.0 3.2

Manufacturing 3.8 5.9 4.4 8.4 7.9 3.6 8.4 7.2 9.3

Electricity, Gas & Water Supply 6.5 3.9 5.9 10.1 8.7 8.7 4.2 3.2 6.7

Services 9.7 8.3 5.6 8.4 10.2 11.1 8.0 8.6 8.0

Construction 3.5 3.8 1.2 6.5 8.7 3.1 1.4 6.9 2.6

Trade, Hotel, Transport and Communications 11.9 12.4 9.9 12.1 8.9 7.4 14.1 12.8 10.6

Finance, Insurance, Real Estate & Business Services 11.9 5.7 5.5 9.3 13.5 13.3 10.2 8.9 9.7

Community, Social & Personal Services 6.9 9.1 2.4 2.8 7.1 19.7 0.1 2.7 4.7

GDP at FC 7.5 6.6 5.3 7.4 8.4 6.8 6.1 7.1 7.4


Annual Economic Indicators and Forecasts

Indicators Units FY8 FY9 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

Real GDP growth % 9.3 6.7 8.6 8.9 6.7 4.5 4.7 7.2 6.8 7.5

Agriculture % 5.8 0.1 0.8 8.6 5.0 1.4 4.7 0.2 2.0 3.0

Industry % 9.2 4.1 10.2 8.3 6.7 0.9 -0.1 6.6 5.7 6.7

Services % 10.3 9.4 10.0 9.2 7.1 6.2 6.0 9.4 8.5 9.0

Real GDP Rs Bn 38966 41587 45161 49185 52475 54821 91698 98271 104953 112825

Real GDP US$ Bn 967 908 953 1079 1096 1008 1517 1611 1615 1791

Nominal GDP Rs Bn 49864 56301 64778 77841 90097 101133 113451 126538 136278 151201

Nominal GDP US$ Bn 1237 1229 1367 1707 1881 1859 1876 2074 2097 2400

Population Mn 1138 1154 1170 1186 1202 1219 1236 1254 1271 1302

Per Capita Income US$ 1087 1065 1168 1439 1565 1525 1518 1655 1649 1844

WPI (Average) % 4.7 8.1 3.8 9.6 8.7 7.4 6.0 2.0 -2.0 4.0

CPI (Average) % 6.4 9.0 12.4 10.4 8.3 10.2 9.5 6.0 5.0 5.0

Money Supply % 22.1 20.5 19.2 16.2 15.8 13.6 13.5 12.0 12.0 13.0

CRR % 7.50 5.00 5.75 6.00 4.75 4.00 4.00 4.0 4.0 4.0

Repo rate % 7.75 5.00 5.00 6.75 8.50 7.50 8.00 7.50 6.75 6.75

Reverse repo rate % 6.00 3.50 3.50 5.75 7.50 6.50 7.00 6.50 5.75 5.75

Bank Deposit growth % 22.4 19.9 17.2 15.9 13.5 14.4 14.6 11.4 12.0 13.5

Bank Credit growth % 22.3 17.5 16.9 21.5 17.0 15.0 14.3 9.5 10.0 12.0

Centre Fiscal Deficit Rs Bn 1437 3370 4140 3736 5160 5209 5245 5126 5555 5897

Centre Fiscal Deficit % of GDP 2.9 6.0 6.4 4.8 5.7 5.2 4.6 4.1 3.9 3.9

Gross Central Govt Borrowings Rs Bn 1681 2730 4510 4370 5098 5580 5641 5920 6587 6669

Net Central Govt Borrowings Rs Bn 1318 2336 3984 3254 4362 4674 4536 4469 4353 4835

State Fiscal Deficit % of GDP 1.5 2.4 2.9 2.1 1.9 2.0 2.5 2.4 2.0 1.5

Consolidted Fiscal Deficit % of GDP 4.4 8.4 9.3 6.9 7.6 6.9 7.1 6.6 5.9 5.4

Exports US$ Bn 166.2 189.0 182.4 251.1 309.8 306.6 318.6 316.7 270.0 283.5

YoY Growth % 28.9 13.7 -3.5 37.6 23.4 -1.0 3.9 -0.6 -14.8 5.0

Imports US$ Bn 257.6 308.5 300.6 381.1 499.5 502.2 466.2 460.9 406.0 428.3

YoY Growth % 35.1 19.7 -2.5 26.7 31.1 0.5 -7.2 -1.1 -11.9 5.5

Trade Balance US$ Bn -91.5 -119.5 -118.2 -129.9 -189.8 -195.6 -147.6 -144.2 -136.0 -144.8

Net Invisibles US$ Bn 75.7 91.6 80.0 84.6 111.604 107.5 115.2 116.2 118.8 121.1

Current Account Deficit US$ Bn -15.7 -27.9 -38.2 -45.3 -78.2 -88.2 -32.4 -27.9 -17.2 -23.7

CAD (% of GDP) % -1.3 -2.3 -2.8 -2.6 -4.2 -4.7 -1.7 -1.4 -0.8 -1.0

Capital Account Balance US$ Bn 106.6 7.8 51.6 62.0 67.8 89.3 48.8 90.0 50.4 75.5

Dollar-Rupee (Average) 40.3 45.8 47.4 45.6 47.9 54.4 60.5 61.2 65.0 66.5

Source: RBI, CSO, CGA, Ministry of Agriculture, Ministry of commerce, Bloomberg, PhillipCapital India Research


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Phill

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Note

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ks, E

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pre-

prov

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pro

fit

Phill

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CMP

Mkt

Cap

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PAT (

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Grow

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Nam

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92

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Siem

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103

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Crom

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169

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VA Te

ch W

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BHEL

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137

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Ther

max

Capi

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Alsto

m In

dia

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Dalm

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CMP

Mkt

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PAT (

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Grow

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Ultra

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LIC H

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Finan

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DCB

Bank

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Bank

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Repc

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Finan

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Bank

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Corp

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cials

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Bank

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Powe

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Cor

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NTPC

Utili

ties

146

1

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77,7

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