8th Pay Commission update: How Fitment Factor could impact stock market growth? Experts say salary hike will…

Salary hike under the 8th Pay Commission will depend upon the fitment factor.

8th Pay Commission update: The Terms of Reference (ToR) of the 8th Pay Commission were approved the Union government in early November, and a significant hike in the salary and pension of central government employees is expected when 8th CPC recommendations are implemented. Notably, stock markets are also expected to witness a major boost with the increase in the salaries of government employees, and analysts note that the fitment factor would determine the level of impact on the equity markets.

How fitment factor will impact stock market?

According to JPMorgan Chase & Co, the revised salaries and allowance of government employees could trigger a “consumption acceleration” in the Indian market, which can prove to be a critical component in “shaping the markets” over the coming years.

Market experts point out that higher pay packages means more discretionary spending, stronger corporate earnings, and greater institutional interest in Indian equities. However, this potential market surge will rest upon how much salary hike employees get, which will be determined by the fitment factor multiplier.

A higher fitment factor translates into a bigger hike in salary and pensions, which in turn would result in more spending power for the country’s 1.2 crore central government employees and pensioners, directly providing a major boost to the Indian markets.

Notably, the impact of salary hikes can gauged from the previous Pay cycles, with 6th Pay Commission triggering a demand in housing, vehicles, and real estate sector on the back of a 40 percent hike, while 7th Pay Commission’s “smaller 23–25 per cent salary hike with minimal arrears”, resulted in a “more moderate boost in everyday spending”, according to JPMorgan.

Why 8th CPC will spark consumption boost?

According to JPMorgan, 8th Pay Commission implementation could have a fiscal impact of $42–44 billion (Rs 3.7–3.9 lakh crore), compared to Rs 1.02 lakh crore burden after the 7th Pay Commission was implemented in 2017.

The global financial firm noted that the 8th Central Pay Commission (8th CPC) could spark a spending surge, which is likely to “stimulate demand in consumer sectors such as automobiles, consumer durables, and potentially mid/low income housing”. Further, JPMorgan observed that “the consumption boost may be especially pronounced in Tier II and III cities, where the largest proportion of government employees reside”.

What is fitment factor?

Fitment factor, which is used to restructure the salary structure of employees in every Pay commission, is arrived upon after taking into to account various factors such as inflation, cost of living index, and Dr. Wallace R. Aykroyd’s formula, which was originally designed to calculate a need-based minimum wage.

The formula accounts for essentials like food, clothing, and housing for an employees plus family, often a spouse and two children, based on consumption units.

The fitment factor for the 7th Pay Commission was fixed at 2.57, and is expected to be between the range of 1.83-2.57 for the 8th Pay Commission.

How fitment will determine salary hike?

Akin to previous Pay commissions, the salary hike under the 8th Pay Commission will depend upon the fitment factor, which was 2.57 in the 7th Pay Commission, and based on various estimates, will be somewhere around 1.92 for the 8th Pay Commission. For example, based on the fitment factor, the new basic pay for Level 6 central employees will be Rs 67,968, (current basic pay Rs 35,400 x 1.92 = Rs 67,968).

So, the basic pay of Level 6 central employees will increase to nearly Rs 68,000, and various allowances will be added which will be the net monthly salary for this pay scale.

According to various estimates, the fitment factor for the 8th Pay Commission is expected to be between the range of 1.83 to 2.57, with the Staff Side of the National Council-Joint Consultative Machinery (NC-JCM), saying that it believes the fitment factor may be 2.57, similar to the 7th Pay Commission.