The Seventh Pay Commission recommendations hang heavy over Budget 2016-17, but the Finance Ministry is optimistic that besides a direct tax boost, there will be a consumption stimulus thanks to higher disposable income with Central staff and a consequent jump in indirect tax collection.

The Seventh Pay Commission report, which was submitted last month, is likely to be implemented from April 1, 2016 (with retrospective effect from January 1). The suggested average 23.55 per cent hike in pay and allowances for 47 lakh Central government employees and 52 lakh pensioners is expected to increase the Centre’s wage bill by at least ?1 lakh crore. Finance Minister Arun Jaitley has been underlining the pay panel report implementation as the key challenge for Budget 2016-17.

The tax authorities expect at least a ?5,000-crore increase in direct tax collections, depending on how the report is implemented and the manner in which arrears are paid.

Further, a senior official said: “We are hoping that the Pay Panel report, which will ultimately translate into more disposable incomes, will have a favourable impact on private consumption and boost demand.” This, he added, is being built into the 2016-17 Budget projections. Finance Ministry officials point out that higher domestic demand is necessary to spur overall economic growth, especially when exports remain subdued due to the global slowdown.

According to GDP data for the second quarter, private final consumption expenditure remained muted, rising 6.8 per cent in the period against 7.3 per cent in the first.

Analysts, too, expect the implementation of the pay panel report to lead to a consumption recovery, especially in sectors such as housing and automobiles.

In a recent report, Bank of America Merrill Lynch said: “The consumption stimulus will persist for two-three years as the Seventh Pay Commission award is implemented by State governments, public sector undertakings and universities.

“We continue to see a consumption recovery of over one per cent of GDP based on softer lending rates, higher public salaries, etc.”

A report by India Ratings also said that after sharing central taxes with States, the Union Government’s net tax revenue will increase by ?21,000 crore.