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7th Pay Panel Award to Spur Savings More Than Consumption: UBS

Global brokerage UBS has taken a contrarian line to the general view that the 7th Pay panel award would boost demand, saying the move is expected to drive savings more than consumption.

Press Trust Of India

Updated:September 25, 2016, 12:26 PM IST
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7th Pay Panel Award to Spur Savings More Than Consumption: UBS
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New Delhi: Global brokerage UBS has taken a contrarian line to the general view that the 7th Pay panel award would boost demand, saying the move is expected to drive savings more than consumption.

According to a UBS Evidence Lab report, the Central Pay Commission (CPC) may not help an urban demand recovery in the second half of this financial year.

The 2016 UBS Evidence Lab survey, which offers insights into the outlook for the second half of this fiscal year, noted that the urban demand recovery would be slower than the market/consensus expectations.

Though survey respondents are hopeful of improved household income, most plan to save rather than spend any increase.

The report has been put together by Gautam Chhaochharia, Head of India Research, UBS Securities, and Sanjena Dadawala, Analyst, UBS Securities.

The general view is predicated on the assumption that a higher spending by government households would lead to boost in consumption, but the report runs counter to it, saying a near-term uptick in consumption is unlikely to be led by government households.

Though the intention to spend during the festive season is higher for government households, only around 35 per cent attributed it to pay commission wage or pension hikes.

Moreover, spending intention for the next 6-12 months is lower or similar for government households as against non-government ones.

As per the survey, most government households plan to save the extra money from the pay panel hikes.

"This implies a limited boost to consumption from the CPC, in line with our anti-consensus view," it said.

However, there are some key sectors that are expected to see some boost following execution of the award.

One of the big beneficiaries in 2018-19 in terms of demand will be cars while growth forecast for two-wheelers is expected to pick up in the second half of this fiscal.

Also, there is a positive trend for personal, homecare products and paints, but no change in gold jewellery consumption demand is likely.

Indian stock markets have been riding high on hopes of a good monsoon and implementation of the salary hike, but the report spoke of likely cuts to consensus earnings for 2016-17.

"We believe that growth expectations for 2016-17 are too high for some consumer-facing companies, Indian markets and the economy, and we expect cuts," the report noted.

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