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Monday, February 11, 2008

Sixth Pay commission to gear up for a spending spree

Pay commission awards are celebration time for government employees and the companies selling goods and services to this class of consumers.

When the government implemented the Fifth Pay Commission (FPC) awards, it resulted in a mad rush at car showrooms and a boom in sales of consumer durables. Marketers hope the families of the 4-million-strong central government workforce will fuel consumption once again.

The finance minister is expected to announce an interim award in anticipation of the final report by the Sixth Pay Commission (SPC), which is likely to reach his table by April ’08. This may be one way for the government to spread cheer among voters in the run-up to next year’s general election.

SPC recommendations are expected to be very generous. Early indications are that the commission may recommend a three-and-a-half times jump in the basic salary of central government employees. The increase will be subsequently applicable for state government employees, defence personnel and those working in public sector undertakings (PSUs).

In all, it is estimated to affect nearly 20 million families and households. Previous pay commissions increased salaries by approximately three times that of the existing ones. Considering past record, we can assume that the government’s wage bill based on SPC recommendations will increase three-fold.

Even if the FM agrees to pass on a fraction of the expected award in the budget recommendation, it will lead to thousands of crores of additional disposable income in the hands of government employees. While they may choose to save part of this windfall, a significant proportion of this is likely to be spent on new purchases, as had happened when the FPC recommendations were implemented in 1999-00.

The FPC had recommended a 31% increase in base salaries, effective from 1996. As the arrears of payments recommended by this commission were also made during 1999-00, this significantly improved the level of personal disposable incomes.

The impact of this can immediately be felt on consumption of consumer durables. The revenues of companies selling white goods, bikes and cars showed a 15% jump on average during FY00 (see adjacent chart). This was despite a general economic slowdown in the economy during 1997-01.

The growth was most striking in the case of car and two-wheeler makers, probably because personal transport has a higher aspiration level compared to home electronics and white goods. Bajaj Auto, Maruti Suzuki, Hero Honda and TVS Motor posted improved sales for FY00. If Hero Honda is excluded from the list, the trend emerges more clearly, showing a higher spending for FY00 than the later years.

There’s no reason to believe why the situation will be any different this time. In fact, SPC’s impact on corporate earnings is likely to be even better, as the economy is chugging along nicely, unlike 1999-00.

Among listed companies, Maruti Suzuki is likely to be the biggest gainer, followed by Tata Motors, Hero Honda and Bajaj Auto. Hence, it’s no surprise that ’08 is likely to see maximum number of new product launches by auto makers. Home builders such as DLF, Unitech and Sobha Developers are also likely to be on the watch list.

And how can we forget consumer durable makers such as Videocon Industries and Mirc Electronics, among others? Higher disposable incomes can also induce households to upgrade to premium brands in personal care and non-durable consumer goods. This will be positive for companies like ITC, Hindustan Unilever, Dabur, Marico and Godrej Consumer, etc.
Source : Economic Times