Sixth Pay Commission: Though purchasing power has soared, industry isn’t amused

Govt data represents changes in the volume of production and not value, keeping out the impact of inflation

Sanjiv Shankaran

New Delhi: Government numbers show Indians are buying more products such as televisions and refrigerators (popularly termed consumer durables), and economists have theories ranging from the so-called wealth effect to the impact of a populist employment scheme that has put more money in the hands of the rural poor.

There is one small problem: The consumer durables industry claims the first three months of fiscal 2008-09, the period ended June, have been “sluggish” as inflation and interest rates rose.
The seeming disconnect between the numbers and the logic behind them, on the one side, and the actual performance of the industry, on the other, could mean one of three things: that the data is flawed; that the volume of consumer durables in trade channels has increased significantly without translating into any rise in sales, with manufacturers probably preparing for a coming spike in demand; or that consumer durable makers are facing the same kind of problems other producers are—higher raw material costs, tighter consumer credit—and are equating these with “sluggishness” in the market while, in reality, demand and sales have risen.

First, the data.

Even as overall industrial activity in June, as represented by the Index of Industrial Production, or IIP, recorded a slowdown in growth year-on-year, consumer goods output soared. According to D.K. Joshi, principal economist and director at rating agency Crisil Ltd, IIP’s consumer goods index can be used as a proxy for consumption of merchandise such as television sets.

Changes in IIP represent changes in the volume of production and not value, keeping out the immediate impact of inflation on the level of industrial activity.
Economists claim this is happening because people are spending more out of a perception that they are wealthier, an impression bolstered by tax breaks and rural job creation.

“On account of the fiscal stimulus such as income-tax benefits, there is a sudden boost in income which has led to a real wealth effect,” says an economist at India’s finance ministry who doesn’t wish to be named. “The income boost through the NREGS has added to it.”
NREGS is short for the National Rural Employment Guarantee Scheme that promises at least 100 days of work a year to one person in a rural family.

The last Union budget tried to boost disposable incomes by offering tax benefits. This was followed by the promise of a pay hike to Union government employees. These two factors jointly created a wealth effect, the finance ministry economist says.
Wealth effect is a term used by economists to refer to an increase in spending that comes along with a real or perceived increase in income.

Pronab Sen, chief statistician of India, who oversees data collection on IIP, says the tax benefits and expected salary increase in the wake of the Sixth Pay Commission report created a wealth effect that was reflected in the production of consumer goods in the first quarter.


Source: http://www.livemint.com/2008/08/27003742/Though-purchasing-power-has-so.html