Mumbai: The implementation of the Seventh Pay Commission is set to boost demand for automobiles. But it is unlikely to propel high-double digit growth the way the implementation of the Sixth Pay Commission in 2010 did, given that the arrears accruing to central government employees and pensioners this time will be far less.
The Union Cabinet on Wednesday approved the implementation of the Seventh Pay Commission recommendations from 1 January 2016. The government also stated that the arrears for the January-May period would be paid this year itself. After the implementation, entry level pay will increase from ₹ 7,000 to ₹ 18,000 per month.
Last time, government employees received arrears for more than 30 months due to a long delay in the implementation of the report. Largely on the back of pay hikes and arrears to government employees, sales of passenger vehicles advanced 19% in 2009-10 and 21% in 2010-11. The spike was also led by a reduction in excise duty by 4 percentage points to 8%. Pay packages of government employees rose by an average of 35%, as per the recommendations of the Sixth Pay Commission.
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Also, this time around, with market leaders Maruti Suzuki India Ltd and Hyundai Motor India Ltd already operating at optimum capacities, it will be an opportunity for laggards including Honda Cars India Ltd, Tata Motors Ltd, Ford India Pvt. Ltd and General Motors India Pvt. Ltd to aggressively tap into the potential buyers, said analysts.
“The ability of Maruti and Hyundai to cash upon the opportunity will be limited by the capacity constraint at their end," said Nitesh Sharma, analyst at Phillip Capital India Pvt. Ltd. This is particularly true of market leader Maruti Suzuki, which is already struggling to meet demand in the domestic market, he said. For the current year, higher sales to government employees is expected to bump up overall passenger vehicles sales by 200 percentage points, he added. Others agree.
“We expect the impact on the overall volumes to be marginal as the payouts are not in lump sum and there are capacity issues," said Puneet Gupta, associate director, I.H.S Automotive, a sales forecasting and market research firm.
But Maruti remains upbeat.
Last year, Maruti sold over 2 lakh vehicles to Central and state government employees and this year, with the implementation of the 7th Pay Commission, it expects to sell 2.5 lakh-plus vehicles in this segment, said a Maruti spokesperson in an email response. “Besides, with network of over 1,900 sales touch points and a slew of new models like Ciaz and Ertiga, Baleno and Vitara Brezza, we will leverage this opportunity," he added, pointing out that Central and state government employees are a high potential segment for the company as they contribute approximately 17% to Maruti’s volumes.
Faced with limited capacity, Maruti is likely to end the year with a volume growth of 8-9% in fiscal 2016-17 against a double-digit growth it envisaged earlier, chairman R.C. Bhargava said in an interview in February. Until the company’s Gujarat plant becomes operational, the company will use improvising measures to hike the output from its Gurgaon plant. This will enable it to increase the capacity to 1.55 million units in fiscal 2016-17 from 1.44 million units in the year that ends in March 2016, he said.
Helped by new model launches, among other factors, sales of passenger vehicles in May grew 6.26% from a year earlier for the 11th straight month. The growth, however, has been led by the top three to four companies even as others continue to be stuck in a neutral gear.
To be sure, boost in disposable income of government employees further brightens up prospects for a relatively newer entrant like a Renault Kwid which has started challenging the market dominance of Maruti and Hyundai.
Even others are doing their bit to attract government employees. On 9 June, Tata Motors announced an exclusive offer for India’s Central and state government employees—‘Trust of India’—a dedicated initiative which focuses on building relationships and a strong customer base among government employees.