Heavy vehicular traffic jam at ITO in New Delhi on Monday, May 2, 2016 PTI
Two and four-wheeler makers are expecting to see a surge in purchases from government employees when the benefits of the Seventh Pay Commission start trickling in.
Government employees and pensioners accounted for 10-15 per cent of the 2.78 million passenger vehicles sold in India last year, according to estimates, translating into more than 400,000 buyers. This number might increase, considering that the pay increase will affect at least 10 million people.
Vehicle makers, however, said they were not expecting an immediate boost to sales, unlike the time when the Pay Commission was brought into effect, simply because the Sixth Pay Commission came with arrears of nearly two years. The current hike will come with arrear benefits of only eight months.
Analysts said rural spending on automobiles would also see a revival as more than half of the beneficiaries reside in rural areas.
"Almost 89 per cent of the central government employees are in the lowest rung, Group C. Further, 53 per cent of the central government employees reside in rural markets and 44 per cent of them are under 40 years," stated a report by Motilal Oswal.
Motorcycle sales, growth of which ended last year in the negative at 10.7 million, would benefit a lot from this pay increase and with disbursements under the one rank, one pension (OROP) scheme.
Yadvinder Singh Guleria, senior vice-president of sales and marketing, Honda Motorcycle & Scooter India, said, "With implementation of 7th Pay Commission coinciding with the onset of monsoon and OROP disbursements, we expect the two-wheeler industry growth to go closer to higher single digits. This will definitely act as a stimulant for the two-wheeler industry. Government employees and their families form a large portion of two-wheeler customers and the timing of release of the money before the festival season may prove to be a turbocharge for the industry."
Entry- and mid- level motorcycles, gearless scooters, hatchbacks, compact sedans are expected to see maximum demand traction.
Central and state government employees are a high potential segment for Delhi-based auto major Maruti Suzuki, too, contributing approximately 17 per cent to its volumes. "Last year we sold over 200,000 vehicles to central and state government employees. With implementation of the 7th Pay Commission, we are expecting to sell 250,000-plus vehicles in this segment," said a Maruti Suzuki spokesperson.
A Credit Suisse report said the 6th Pay Commission implemented in 2008, resulted in 10-fold increase in Maruti Suzuki's sales to government employees in four years. Its share of sales to government employees rose to 15 per cent from two per cent during that period. Hyundai, India's second biggest carmaker, has seen sales to government employees increase to 7.2 per cent in 2015 from 5.5 per cent in 2014. It is now looking at 9.5 per cent in 2016, or 50,000 units.
Tractor sales, which had been reeling under crop failures, erratic and inadequate monsoon and inclement weather since the past two years, would also reap the benefits of the pay hike.
"The current macroeconomic environment is very different from the one prevailing during the implementation of the 6th Pay Commission. The 7th Pay Commission wage hike is smaller than the last time, hence the arrears gains and expected benefits this time are likely to be relatively lower than the previous one. As the market leader, Hero MotoCorp two-wheelers have been the preferred choice of customers, and we believe that this could also be the case when beneficiaries of the pay commission choose to buy two-wheelers," said a spokesperson at Hero MotoCorp, the country's largest two-wheeler company.
The Society of Indian Automobile Manufacturers had lowered its growth forecast to 6-8 per cent for the current year after the government slapped new taxes during the Budget. Analysts said this pay hike would help ease some growth pressure.