Industry looks at a big demand push

CABINET NOD TO SIXTH PAY COMMISSION AWARD

The government’s move to raise wages for its employees on the basis of the recommendations of the Sixth Pay Commission is likely to boost demand for consumer durables, automobiles and homes, industry executives have said.

More than 5 million government employees are expected to get an average pay increase of 21 per cent from January 2006. This will put a sizeable amount of disposable income in their hands.

The automobile sector expects consumers to be able to pay for the increased down payment after lenders reduced funding because of slowdown and fear of climbing defaults.

“As banks had reduced the loan-to-value ratio for vehicles, this increase will help consumers fund the increased down payment,” said Arvind Saxena, vice-president (marketing and sales), Hyundai Motors India.

The revision means the minimum salary of a central government employee will be Rs 6,000-7,000 a month, empowering first-time buyers. The makers of two-wheelers and low-cost consumer durables may benefit the most from the revision.

“Such things should bring more business to the two-wheeler industry. About 15 per cent of our buyers belong to the government sector,’’ said Naresh Rattan, divisional head (marketing and sales), Honda Motorcycle & Scooter India.

The penetration of consumer durables is still low in India, indicating a large base of first-time buyers. Sector experts pointed out that the new pay package would enable a large chunk of consumers from tier-II and tier-III cities go for their first purchases.

“It is the disposable income that goes into discretionary purchases and this is a positive sign for us since the durables category tends to attract this expenditure,” said V Ramachandran, director (sales & marketing), LG Electronics. The additional money may also help some consumers upgrade, lifting sales of these products ahead of the start of the festival season.

The real estate sector, which recently diversified into mid- and low-cost housing to beat the slowdown, also expects to benefit from the wage hike, especially the arrear payments.

“Most government officers wanting to buy apartments lack enough resources. When large sums of money will come into the market, liquidity will ease and property sales will improve,” said Pradeep Jain, the chairman of Parsvnath Developers.

The realty sector has been hit by the central bank’s move to raise interest rates. The Reserve Bank of India has, in the recent past, raised the repo rate, at which it lends to banks, by 125 basis points three times, forcing commercial banks to raise consumer loan rates by 50-100 basis points.

“Employees will have more money to pay the increased equated monthly instalments (EMIs), said JC Sharma, managing director of Bangalore-based Sobha Developers.

(Suvi Dogra, Swaraj Baggonkar, Raghavendra Kamath contributed to this story.)