Oct 29, 2015

Is Seventh Pay Commission the big stimulus that auto sector needs?

New Delhi: India’s automobile sector is keenly awaiting the recommendations of the Seventh Pay Commission in the hope that government employees will flock to showrooms with their pockets loaded with cash.

Yet, what may still go against the industry is if the Pay Commission’s recommendations are implemented as soon as the report is submitted. This will mean that the implementation may not have any retrospective impact, unlike in the past, and that will lead to less or no lump sum amount as arrears in the accounts of government employees, which in turn may not have the desired impact on auto sales.

However, a historical analysis of auto sales shows that arrears and pay hikes of government employees have led to immediate spike in the purchase of two-wheelers and passenger vehicles in the country.

For example, when the government implemented the Sixth Pay Commission report in 2008, sales of passenger vehicles grew 19.45% to 2.22 million units in 2008-09 and 21.18% to 2.8 million units in 2009-10, according to data provided by the Society of Indian Automobile Manufacturers (Siam). Sales of two-wheelers grew 16.11% to 9.7 million units in 2008-09 and 31.22% to 12.73 million in 2009-10.

During this period, the total remuneration of Central government employees alone went up from Rs.45,962.60 crore in 2007-08 to Rs.73,717.80 crore and Rs.96,589.70 crore in 2008-09 and 2009-10, respectively, according to data provided by the Centre for Monitoring Indian Economy.

Pay packages of government employees rose by an average of 35%, as per the recommendations of the Sixth Pay Commission. They also received arrears for more than 30 months due to delay in the implementation of the report.

The Sixth Pay Commission had submitted its report a little ahead of its deadline on 24 March 2008. The revised pay scales were implemented retrospectively, starting 1 January 2006, while recommendations relating to allowances were implemented prospectively.

This was also the period when the global economy was grappling with economic recession and car sales in India were helped by the Indian government’s move to reduce excise duty by 4 percentage points to 8%.

Following the Fifth Pay Commission report that was implemented in September 1997, sales of passenger vehicles jumped 33.19% to 689,000 units in 1998-99 and two-wheeler sales grew 11.74% to 3.64 million units.

When the Fourth Pay Commission report was implemented in 1987-88, sales of two-wheelers jumped 11.37% to 1.55 million in 1988-99 and 11% to 1.75 million in 1989-90. Sales of passenger vehicles grew 12.38% to 219,000 in 1988-99 and declined 2% in 1989-90. Those were the days when India was still opening to globalization.

From the Seventh Pay Commission, there are expectations of tweaks to retirement age, performance-linked pay and flexible work hours for women and employees with disabilities, apart from pay hikes. In August, the government extended the Commission’s term by another four months till 31 December to give recommendations. The recommendations were expected to be effective from 1 January 2016. If there are delays, the pay revisions would again be done with retrospective effect.

India employs at least 4.8 million Central government employees and 5.5 million pensioners and over 10 million state and local government employees. An increase in their salaries will open up an ocean of opportunities for Indian auto makers, some of whom are still recovering from a prolonged slowdown that started in 2012.

Passenger vehicle sales have grown 6.22% to 1.33 million units during April-September, while sales of two-wheelers have declined 0.36% to 8.11 million units.
SOURCE - livemint.com