Mood’s sees risk of inflation from 7th Pay Commission award

Global rating agency Moody's Investor Services expects inflation in India to accelerate from its current moderate levels with a liquidity swell with the implementation of the Seventh Pay Commission award.

While a better than normal monsoon rainfall will help maintain moderate food price inflation, contributing to keeping headline inflation within or close to target this year, an injection of over 60,000 crore into the economy in one go could spell pressure on prices, Mood's said.

The RBI, too, in its bi-monthly monetary policy released today, said it expected some upside risk to 5 per cent inflation target by March 2017 mainly on account of the 7th Pay Commission award.

"Medium-term, we assume that inflation will remain moderate. Should higher wages boost consumption significantly, inflationary pressures could rise. When the full 7th Pay panel recommendations are implemented, further inflationary pressure could arise as a consequence of the increase in housing allowances," Marie Diron, senior VP, Sovereign Risk Group, Moody's Investors Service, said.

The government has notified 2.57-time hike in basic salary of one crore government employees and pensioners as per the 7th Pay Commission recommendations. The pay hike has been made effective from 1 January 2016.

The Pay Commission recommendations, once implemented, are expected to boost consumption demand, and in turn growth. The dash of additional expenditure is expected to prod restarting of the virtuous cycle of consumption, investment, growth, and profits.

However, it is also going to increase the general expenditure of the government. When these recommendations were made, inflation was moderate. But the implementation of these recommendations is coming at a time when inflation is rising again. So there are chances that a spike in demand supported by higher pay to the government staff may push the inflation further up.

Moody's said there are upside risks related to the implications of the rise in public sector wages with the implementation of some of the Pay Commission's recommendations.

"However, the less accommodative monetary policy stance at present than in 2009-13, when the RBI's policy interest rates were well below inflation, mitigates these risks," Diron said.

Citing upside risks to the Reserve Bank's inflation target, Governor Raghuram Rajan today maintained status quo on key rates at his last policy review meeting.