NEW DELHI, May 26: Increased purchasing power in the hands of consumers, as a result of the recent tax cuts and the implementation of the 5th Pay Commission, will give a fillip to industrial growth in the current year.

While quantifying the extent of the increase in disposable income, the latest quarterly report from HSBC B&K (part of the HSBC investment bank), also states that increased agricultural incomes will boost demand substantially. In the event, HSBC expects industry to grow by 9 % this year as compared to 7 % last year.

According to calculations done by HSBC's economist Rajan Govil, the lower taxes announced in the budget will result in an increase in disposable income of Rs 4,700 crore. The implementation of the pay commission's report -- a 20 % hike in salaries of central government employees with retrospective effect from January 1996 -- will see a hike in disposable income of Rs 4,800 crore (after taxes and provident fund contributions have been made).

Based on the average multiplier effect of this spending, HSBC estimates that GDP will increase by close to Rs 17,900 crore, or an increase of 1.2 %.While no quantification has been done of the impact of higher rural incomes as the sector is deregulated further, the report points out that terms of trade have already started moving in favour of agriculture.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.