Mumbai: At a time when the economy is growing at its slowest pace in six years and hitting consumer confidence, India’s car makers have had an unexpected stroke of good luck: the Sixth Pay Commission wage hikes and arrears.
Helped along by special promotions by car manufacturers launched in the second half of last year, many government employees are using the arrears, which are retroactive from January 2006, to buy cars.
Revving up: The Samara Hyundai showroom in the Capital. Sales at Hyundai Motor India to government employees rose to 14% from 6%. Madhu Kapparath / Mint
For some such as Dinesh Chand, a clerical assistant with the ministry of home affairs for 28 years, the arrears helped realize a cherished dream. “I have always wanted to buy a car for my family, but it was always out of my reach. The arrears and the expected increase in salary helped me make my decision to finally buy one,” said Chand, who bought a Maruti Suzuki Zen.
The sales numbers for two of India’s largest car makers, Maruti Suzuki India Ltd and Hyundai Motor India Ltd (HMIL), reflect the trend more accurately.
Maruti, the country’s largest car maker by sales, saw buyers from the government sector double from 4,000-5,000 to 8,000-9,000 a month since it announced a special offer in October, said Mayank Pareek, the company’s chief executive officer (sales and marketing).
Similarly, sales at HMIL to government employees also grew to 14% from the earlier 6%, said Arvind Saxena, senior vice-president (sales and marketing). Since October, the firm has sold 14,500 cars to government employees.
A 26 February report from Credit Suisse, written by Govindarajan Chellappa and Swapnil Nadkar, on the impact of the pay commission on auto demand estimated that it could generate as many as 300,000 potential buyers. The report says the car industry will likely benefit the most from the Sixth Pay Commission.
Following the wage hikes, at least 3.9 million employees have got raises in the range of 30-60%, with at least 1.1 million earning above Rs20,000 a month.
To be sure, the report assumes that a household earning above Rs25,000 a month is a potential car buyer; this segment has grown by 600,000 after the wage hikes.
An added benefit for manufacturers is a decline in ownership costs of a car that could push demand. Ownership costs are classified as the costs incurred to maintain and use the car, such as fuel costs, servicing charges and spare parts expenses.
A 26 February report from BNP Paribas analyst Joseph George said the cuts in excise duty have reduced prices of cars and motorcycles by nearly 6-7%. After adding lower ownership and operating costs due to lower fuel prices and lower interest rates, the total ownership costs will return to levels last seen in 2001.
However, not all car manufacturers have benefited from the combination of wage arrears, lowered excise duties and declining ownership costs. For General Motors India Pvt. Ltd (GMI), the promise held out by the arrears did not translate into large volumes. “The response was, in fact, very lukewarm and we sold only about 175 units under the special scheme that we floated for government employees, who were eligible for the pay commission’s arrears,” said P. Balendran, vice-president at GMI. But he’s not calling it quits yet, saying the company will offer a special scheme for government employees when the second tranche comes in.
HMIL’s Saxena is cautious and said: “I don’t see an increase in the share and expect sales in the segment to maintain the same momentum in the forthcoming months.”
Pareek, however, said the second instalment will be more beneficial to Maruti than the first round.
“This is not even the tip of the iceberg,” he declares. “As we go along, we expect selling at least 20-30% more in the segment, once the second instalment kicks in in the next fiscal.”