02/07/2016
Indian Economic Update
Amendment of RBI Act paves way for MPC
Government amendment of the RBI Act (1934) by the Finance Act 2016 paves the way for setting up a Monetary Policy Committee (MPC). This is in line with international experience.
A six member MPC with the RBI Governor as the Chairman and three external members will be constituted with the former entitled to a casting vote.
The MPC is likely to be formed within the next few months. In addition, fiscal policy and selection of the next RBI Governor will remain in focus in the near term.
Cabinet approves 7th Pay Panel recommendations
The Cabinet approved the recommendations of the Expert Committee on 7th Pay Commission(PC). The recommendations will result in 23.6% increase in total wage bill and pension of the Central Government employees. Total financial impact of 7PC (including allowances) in FY2017 had been estimated at ₹ 1021 bn. However, given that the approval is only to pay and pensions for now, the current government outgo amounts to ~₹ 849 bn.
Key highlights are as follows:
Allowance hike not yet approved: The Cabinet has approved the recommendations on hike in pay and pension, amounting to 16% and 23.6% respectively. The hike in allowances (including ~139% hike in House Rent Allowance) hasn’t been approved, leading to a government saving of ₹293 bn.
Current allowances will be continued to be paid. Finance Minister highlighted that 2-3 groups will be appointed on pay allowances hike.
7PC to be implemented retrospectively from Jan 2016: Arrears with effect from Jan 2016, amounting to ₹ 121.3 bn, will be paid within this fiscal. However, the payment will be done in tranches.
Minimum pay increased from ₹ 7000 per month to ₹ 18000 per month
Gratuity to be hiked from ₹ 10 lakhs to ₹ 20 lakhs
Impact of 7PC on fiscal to be watched
The total financial impact of 7PC has been pegged at ₹ 849 bn currently. Of this INR 606.1 bn (71%) will be borne by the General Government budget while ₹ 243.2 bn (29%) will be borne by the Railway Budget in this fiscal. In FY2017, the Government aims to reduce deficit by 0.4% of GDP to 3.5% of GDP.
Given that allowances have not been approved, the impact on inflation will be limited in the near term. There is likely to be some second round impact on inflation on account of likely boost in consumption demand.
Other important data released during the week -
India Apr-May fiscal gap stood at 42.9% of the FY2017 budget aim of ₹ 5.34 tn vs. 37.5% in the same period, last year.
India's eight core industries' growth came in at 2.8% YoY in May vs. prior print of 8.5% YoY.
IMD reported further advancement of southwest monsoon in some more parts of East Rajasthan, Himachal Pradesh, Uttarakhand, West Madhya Pradesh, Uttar Pradesh, Punjab & Haryana, entire Chandigarh & Delhi and parts of West Rajasthan during next 2¬-3 days.
RBI released its June 2016 Financial Stability Report. The report highlighted unintended side effects of current ultra-easy monetary policies pursued in many advanced economies. The report also talked about firm growth and investment potential in India as compared to other emerging market economies, though there is a need for a fillip in gross fixed capital formation to sustain higher levels of growth.
Global Update
In a historic move, the United Kingdom voted to exit the European Union, with 52% voting in favour of the “leave” side.
Moody’s revised UK’s sovereign rating to negative from stable on Saturday. Bank of England (BoE) Governor Mr. Mark Carney in an address following the result of the UK referendum remarked that the Central Bank will take additional measures as markets adjust to the outcome, if needed. The Central Bank has also decided to provide additional funding to the tune of GBP 250 bn through its normal facilities.
Standard &Poor's(S&P) downgrades UK to AA from AAA earlier and Fitch has lowered its rating to AA as well from AA+ earlier, citing growth concerns post Brexit.
Britain’s PM was asked to leave the summit in Brussels, while leaders of the remaining European Union (EU-27) talked about the rise of hostility driven populist sentiments in member states. The members also decided to hold another meeting in Bratislava in September.
Mr. Boris Johnson ruled out his bid to be the next British PM, while British Home Secretary Ms. Theresa May and Justice Secretary Mr. Michael Gove announced their bids for the prime-ministership.
S&P downgraded its long term credit rating on European Union to AA from AA+. However, it raised its outlook to “stable” from “negative” after the Brexit vote.