The 7th Pay Commission is likely to hike salaries of government employees by nearly 40%, according to an analyst at global brokerage firm Credit Suisse.
The Pay Commission is scheduled to submit its recommendations by October. The recommendations are likely to be implemented by the Central and state governments next year.
"As the Pay Commission numbers come through there could be a 30-40 per cent increase for each individual," Neelkanth Mishra, India equity strategist at Credit Suisse, told NDTV.
"It won't be as big as last time because it was driven by a lot of arrears but definitely a large number of government employees will come into the pay bracket which can afford to have, for example, four-wheelers," he added.
He said such an increase would boost "discretionary spending" in the country, as a third of India's middle class are employed by governments.
"In Tier 3, Tier 4 towns where government employees are 50-60 per cent of the middle class, it is very likely that real estate markets will take off again," said Mishra.
The Central and state governments will take about six months to implement the recommendations after the Pay Commission submits them in October, he said.
The governments of Gujarat and Madhya Pradesh have already hinted at implementing the 7th Pay Commission recommendations from 1 January, 2016, he said.
The economy would get a major boost from a pickup in consumption, resulting from an increase in salaries, he added.
The flip side to the hike will be a spike in inflation.
"Clearly if you see a third or 35 per cent of your middle class getting a 40 per cent or 30 per cent jump in compensation in one shot, the fears of inflation will rise," said Mishra.