How Fitment Factor could impact stock market growth? Experts say salary hike will...

8th Pay Commission Salary Hike: How Fitment Factor Will Impact Stock Market

The Union government has approved the Terms of Reference (ToR) of the 8th Pay Commission, paving the way for a significant hike in the salary and pension of central government employees. This move is expected to boost the stock markets, with analysts noting that the fitment factor will determine the level of impact on the equity markets.

What is Fitment Factor?

• The fitment factor is used to restructure the salary structure of employees in every Pay commission.
• It is arrived upon after taking into account various factors such as inflation, cost of living index, and Dr. Wallace R. Aykroyd’s formula.
• The formula accounts for essentials like food, clothing, and housing for an employee 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 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.

• Higher pay packages mean more discretionary spending, stronger corporate earnings, and greater institutional interest in Indian equities.
• 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.
• The impact of salary hikes can be 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.

Fiscal Impact of 8th Pay Commission Implementation

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”.

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.

Staff Side of NC-JCM Estimates Fitment Factor

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.