Economy: Cabinet approves 7CPC allowances - Kotak

Cabinet approves 7CPC allowances. The Cabinet's approval of central government employees' allowances was mostly as recommended by the 7CPC. The fiscal impact in FY2018 is likely to be around Rs230 bn (0.15% of GDP). If accommodated through lower capital expenditure, it could imply downside risks to growth. We also estimate around 95 bps of upside to our earlier March 2018 estimate of 4%. The RBI will be cautious on the inflation trajectory though near-term downside is likely to keep the door open for a 25 bps of rate cut.

Likely fiscal impact of Rs230 bn in FY2018 from the approved 7CPC allowances

The Cabinet Committee on Economic Affairs approved the structure of allowances finalized by the Empowered Committee of Secretaries on the basis of recommendations made by the Committee on Allowances. This would entail an increase of Rs307 bn per annum in the central government budget-a nominal Rs14 bn higher than the 7CPC estimates. HRA related increase should be around Rs180 bn and other allowances should increase by around Rs127 bn. As the implementation is from July 1, 2017, the fiscal impact for FY2018 will likely be around Rs230 bn (0.15% of GDP).

Funding the additional expenditure could be a challenge

Funding the additional expenditure could be challenging given that revenue side could see headwinds from (1) any temporary revenue downside post-GST implementation, and (2) uncertainty on divestment proceeds. On the other hand, there could be an upside from RBI's profit transfer. This would depend on the quantum of demonetized notes not deposited back as also the legalities of its accounting. In case the government has to reduce capital expenditure, it could have headwinds for GDP growth as FY2018BE expenditure growth is already lower than in FY2017. We should be watchful of post-GST revenue growth as well as RBI's profit transfer (likely announcement in July).

Likely inflationary impact of around 95 bps by March 2018

The RBI has been wary of the inflationary impact of HRA implementation. We estimate that the impact form the central government's implementation will be around 90 bps with March 2018 inflation increasing to 4.95% compared to our base case of 4%. However, this is a statistical impact without much real impact. If states also start implementing along with the center (not our base case) this effect can be amplified given the way HRA is incorporated in the CPI basket. This is a transitory impact, but the RBI will be wary of inflation inching close to 6% the upper end of its inflation target. This will keep the RBI in a cautious mode. However, we continue to expect 25 bps rate cut in the August policy acknowledging (1) the lower-than-estimated inflation trajectory, and (2) transitory nature of HRA impact. June and July inflation is likely to be below 2%.

Source : Equity Bulls

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