Pay commission report impact: Street split on consumption demand boost

The Seventh Central Pay Commission’s recommendation of a 23.55 per cent hike in pay, allowances and pensions (increase of Rs 102,000 crore) for central government employees is much higher than the Street’s expectations of a 15-20 per cent hike. That should have lifted the spirits of India’s consumer-focused companies.



But, the subdued response of the S&P BSE Consumer Durables and S&P BSE Auto indices (up only 0.4 per cent and 0.6 per cent, respectively) on Friday tell a different story. The S&P BSE Realty and FMCG indices were down 0.3 per cent and 0.8 per cent, respectively, though optimists took solace that many individual stocks were up about a per cent, against a flattish Sensex.

Many market observers say part of the muted response can be explained by the difference between the hike given by the Sixth Pay Commission in March 2008 and the Seventh. Also, data given in an HSBC report doesn’t inspire any hope of a huge consumption boost following such increases. For example, during the Sixth Pay Commission years, consumer spending on items such as transport equipment (cars, two-wheelers and the rest), health and housing went up marginally, but all others (hotels, household goods etc) recorded a decline.

  Some analysts are, however, hopeful. “The Rs 100,000 crore is a sizeable stimulus to consumption even if other factors are not very supportive currently,” say Kotak Institutional Equities’ analysts led by Sanjeev Prasad.

Religare Institutional Research’s analysts expect state government pay hikes to total around Rs 240,000 crore or another 1.5 per cent of the gross domestic product (GDP). “In all, central and state governments (via gradual pay hikes of 10 million state government employees over the next two years) will pump in about Rs 340,000 crore into the economy. This is in line with our expectations of a $50-billion stimulus.”



The optimistic ones say automobile, consumer durables and real estate companies stand to gain most from the pay hikes. Within the four-wheeler auto segment, Nomura expects Maruti Suzuki to benefit the most as its products in the entry segment would appeal to these employees. "After the sixth pay commission, Maruti's sales to government employees rose from four per cent of volumes in FY08 to 14 per cent in FY11 and 17 per cent in FY15," Kapil Singh and Siddhartha Bera of Nomura wrote in a November 19 report.

Indranil Sen Gupta, India economist at Bank of America-Merrill Lynch, too, believes that the recommendations have boosted their confidence as regards a recovery in consumption and will largely be spent on consumer discretionary items and housing. With the actual pay-out likely in the June 2016 quarter, he says, the consumption stimulus will persist for two–three years.

Rahul Agrawal of Religare Institutional Research expects consumer discretionary companies such as Bajaj Auto, Maruti Suzuki, Hyundai Motors, Jubilant FoodWorks, Bata, Asian Paints, Voltas and KJC Kajaria Ceramics to benefit the most from these measures FY17-18 onwards. While analysts at Citigroup remain positive and expect consumption growth to improve to 8.4 per cent in FY17 versus 6.3 per cent in FY15, CARE Ratings estimates a secondary impact on steel, electric goods, auto parts, etc. “Banks would experience increased business in the form of higher home loans,” says CARE Ratings.

But the other camp has equally strong views. Analysts at Ambit Capital believe the demand for durables is unlikely to improve meaningfully like it did post the sixth pay commission due to lesser hike this time (versus 35 per cent earlier) and minimal arrears this time. They believe small ticket size items such as footwear, apparel, kitchenware, paints and light electricals could benefit more this time. Analysts at Nirmal Bang, too, believe the impact on consumption demand will not be sizeable.

G Chokkalingam, founder and managing director, Equinomics Research & Advisory, echoes this view. "The additional income in the hands of central government employees constitutes about 0.5 per cent of projected GDP in FY17 and may not give any boost to the consumer goods manufacturers as a major part of this would be chucked away from them by revival in inflation rates and further higher duties (further on fuels as long as oil price remains subdued) and taxes (especially on services) likely to be imposed by the government to meet its growing expenditure needs," he says.