This is not to say that the entire GDP growth for the 2009-10 and 2010-11 was because of the implementation of Sixth Pay Commission, but indeed it was a factor

As the government has cleared the Seventh Pay Commission recommendations to increase compensation for government employees, there are concerns about how the huge cash outgo on account of the hike is going to impact the fiscal situation of the economy.

However, a section of experts are of the view that despite such concerns, on a net basis the pay hike will indeed be a huge boost to consumption demand and in turn contribute to the GDP growth.

A look at past data shows that this is indeed true.

The Sixth Pay Commission submitted its recommendations in March 2008 and they were implemented in August 2008. The pay hike was with effect from 1 January 2006.

The panel had recommended 20 percent increase but with arrears the effective hike amounted up to 40 percent.

The total expenditure on account of the hike could have been around Rs 43,000 crore. This has been arrived at through a simple calculation. According to the Seventh Pay Commission report, the implementation of the sixth pay panel had resulted in an expenditure of 0.77 percent of GDP. The GDP in 2008-09 was Rs 56 lakh crore. So the absolute outgo would have been Rs 43,000 crore.

So how did this impact the economy?

Take a look at the figures below:

In 2008-09, the year in which the hikes came into effect, the GDP growth stood at 6.7 percent. You have to remember that this growth has happened despite the fact that the global economy was going through the financial crisis. The next two years, the GDP witnessed a growth of 8.6 percent and 8.9 percent.

The nominal GDP growth too witnessed a slowdown in 2008-09 but saw a rebound in the two subsequent year - 15.1 percent rise in 2009-10 and whopping 20.2 percent rise in 2010-11.

In 2015-16, India's GDP grew 7.6 percent and in the current year the governmemnt has pegged the growth at around 7.5 percent. The GDP in absolute terms was at Rs 136 lakh crore in 2015-16. In 2016-17, the GDP stands at Rs 150.65 lakh crore (at current prices). What this also means is the impact of Seventh Pay Commission, if any, will be bigger than earlier.

This is not to say that the entire GDP growth for the 2009-10 and 2010-11 was because of the implementation of Sixth Pay Commission. As Richa Gupta, senior economist, Deloitte India, says there were many other factors such as MNREGA, the rural jobs scheme of the UPA that had boosted the rural income; some other UPA policies that were bearing fruit; there were bountiful rains and also India had built up forex reserves. It is also important that sharp monetary easing globally and domestically during the crisis period had resulted in dollar inflow and boosted growth. Nonetheless, the Sixth Pay Commission was indeed a factor.

This report in International Business Times citing global brokerage firm Bank of America Merrill Lynch says that the implementation of the hike had boosted two-wheeler and car sales and increased demand in the cement sector.

Another report in NDTV quotes Jai Shankar, chief India economist of Religare, as saying: "The arrears resulted in robust demand for consumer discretionary products that resulted in sustained stock performance over 3-5 years."

"In the aftermath of recent international developments (read Brexit), that have made the global headwinds stronger, a consumption demand boost owing to higher disposable income in the hands of government employees will provide some further cushion to growth in the economy," said Ranen Banerjee, leader - public finances, PwC India.

He also allays the fears of impact the huge outgo will have on the fiscal front.

"Concerns lie on the quantum of additional outgo of Rs 1 lakh crore. The total capital expenditure outlay of the government in FY17 is Rs 2.4 lakh crore. Thus, the capital expenditure should not come under threat owing to this. The outgo will also possibly be staggered across FY17 and FY18. The impending implementation of GST in FY18 may provide the revenue needed to fund this additional outgo," he says.

India Ratings chief economist Devendra Pant sees a Rs 45,110 crore consumption boost (0.30% of GDP) to the economy and Rs 30,710 crore (0.20% of GDP) savings increase. The rating agency believes after the sharing of central taxes with the state governments, the central government’s net tax revenue will increase by Rs 14,100 crore (0.09% of GDP) in FY17.

"The revised salaries of central government employees are likely to be paid from 1 July 2016. While the employees will get salary arrears from 1 January 2016, allowances will be paid only from 1 July 2016. Thus the gross impact of 7CPC is likely to be Rs 94,775 crore (0.63% of GDP)," he says

The government will collect income tax on this pay out and excise duty on consumption, after sharing the increase in income tax and excise duty with states. "Thus the net impact on the central government finances is estimated to be Rs 80,641 crore (0.54% of GDP)," he calculates.

The rater said the impact of pay revision of state government employees will be felt only in 2017-18. The Pay Commission award is expected to be less severe on state finances than expected earlier due to a lower arrears pay out. In all likelihood, the impact of a salary revision of the Seventh Central Pay Commission on state government finances will be Rs 1.58 lakh crore in 2017-18 (0.95% of FY18 GDP).

With inputs from Rajesh Pandathil