Car, home and consumer durable sales are expected to go up after the implementation of the Seventh Pay Commission recommendations, giving a much needed boost to the Modi government's efforts to put the economy back on track.
The Commission, headed by Justice AK Mathur, recommended a 16% hike in basic salary and a 63% increase in allowances for government employees, taking the overall hike in salaries to 23.55%.
It proposed a massive 139% hike in house rent allowance (HRA) for the employees, which could give a fillip to the struggling real estate sector in the country.
"The seventh Central Pay Commission report should result in a large consumption stimulus for the economy in FY2017-18... We expect automobiles, consumer durables and real estate sectors to benefit from the largesse," NDTV Profit quoted Sanjeev Prasad of Kotak Equities, as saying.
Auto, consumer durable and real estate stocks traded higher on the Bombay Stock Exchange (BSE) on Friday, supported by the recommended hike in salaries of government employees.
The government's expenditure on salary payments to employees will go up by a whopping Rs 1 lakh crore upon the implementation of the Commission's proposals.
The additional cost to the government will give a "sizeable" stimulus to consumption in the country, said Kotak Equities in a report.
However, the increase in the government's salary bill is expected to weigh on its efforts to bring down the country's fiscal deficit.
"A recommended 23.55% increase in remuneration for India's central government employees, if fully implemented, would have a significant impact on the government's wage bill, and add to challenges the government faces in achieving fiscal consolidation targets," said Fitch Ratings. "The government could seek to cut expenditures in other areas," it said.
Salary hikes are also expected to stoke inflationary pressures in the country, reducing the scope for interest rate cuts by the central bank.