Will the original stimulus help spur demand?

Kumar, a senior officer with the Indian Audit and Accounts Service, is on a high these days. Over the next few months, he expects to bring home a brand new Honda City car as his balance salary arrears under the Sixth Pay Commission are paid out.

Under the revised pay scale applicable to his post, Kumar’s take home has almost doubled. And with arrears being paid from January 1, 2006, he gets a windfall of around Rs 7 lakh over and above the monthly packet. Some 40% of the arrears were paid in October-November, last year. The rest would come in by September this year.

And Kumar isn’t the only one buying a car this year. He can name many in his department who are waiting eagerly, as also several of his friends and training mates in other central government services.
In fact, given the size of the payouts, any central government employee who is not buying a car this year must be looking at buying or building a house, or acquiring some expensive household goods, says Kumar.

The buoyancy isn’t lost on the car manufacturers, who have had several quarters of slowdown now. Many have been running special discount schemes for government and public sector employees with an eye on the arrear payouts and higher salaries.

Market leader Maruti Suzuki has in fact started reaping the benefits of the scheme it launched last year, offering government employees discounts of Rs 7,000-10,000 depending on the model. A spokesperson of the company says the company has sold around 40,000 cars to government employees since last year.

Hyundai is also offering discounts. Rajeev Mitra, head of corporate communications, Hyundai Motors says the company started a scheme in October 2008, applicable on Santro i10, Getz (petrol variant), Accent (executive) and Verna. The discount ranges between Rs 14,000 and Rs 29, 000.

Among others, Honda is offering big discounts, too, and finding takers.

So, if one were to ask how many economic stimuli the Manmohan Singh government has tried giving the economy till date, the answer is four, not three as most people would say.

The hike in salaries of 1.7 crore central government, state government and public sector employees, and increase in pensions of around 1 crore pensioners, who together constitute 11% of households in India, was the first, and by far the biggest economic stimulus, say analysts.

Analysts Nemkumar, Gopal Ritolia and Ashutosh Datar of India Infoline believe the biggest stimuli to both household consumption and savings in financial years 2009 and 2010 will come from the $45 billion (around Rs 2.25 lakh crore) pay hike to government employees based on the recommendations of the Sixth Pay Commission.

If these people go out and spend a portion of this, it may turn out to be a bigger stimulus than the three stimuli the government has officially announced after this, the three analysts write in a February 26 report titled ‘Pay Commission - A serendipitous stimulus’.
Also, since the increase in salaries was backdated (from January 2006), the government had to pay arrears to these employees and pensioners.

Sujan Hajra, chief economist, Anand Rathi says that for the next fiscal, the ball park gross figure for what the central government employees will get paid is Rs 36,000 crore (60% of the payout remaining). “If we assume that state governments will give the same hike as the central government, the payout in their case will be Rs 1,80,000 crore (considering the number of state government employees is many times more).”

Typically, state governments give only 75% of the central government pay most of the times. “But even a Rs 1,35,000 crore package (75% of Rs 1,80,000 crore) is much bigger than the officially announced stimuli. It will add more than 1% of GDP,” says Hajra.

But just what proportion of these arrears will be spent?
Sonal Varma, India economist with Japanese brokerage Nomura International sees a 50:50 split between spending and saving on the arrears.

Arrears are a “good income boost and we could see some impact on sectors like auto, where numbers in January already showed a rise,” says Varma. “Though it is difficult to say how much of it will be spent, government employees don’t have to worry about job losses as much as private employees, so they may spend more.”

And car manufacturers aren’t the only ones seen benefiting. Besides auto, the India Infoline analysts see cement, white goods manufacturers and to some extent FMCG companies benefiting, too.

Among listed auto companies, they expect Maruti, Hero Honda and Bajaj to be the key beneficiaries.

Vaishali Jajoo, analyst with Angel Broking, dittoes.

An analyst with a leading brokerage firm includes jewellery, durables and apparels among the likely gainers from the Pay Commission bonanza. And retailers and paint makers, too.

Ajit Joshi, CEO and managing director, Croma is optimistic.
So is Roli Malhotra, manager- marketing, Sia Lifestyles. “A major chunk will go towards immediate aspirational spends on economical lifestyle solutions, like silver or silver jewellery or art jewellery and garments.”

But the macro uncertainties cannot be lost sight of.

Laveesh Bhandari, economist at Delhi-based Indicus Analytics, says, in times such as these, people may think of saving rather than spending.

Anubhuti Sahay, associate economist at Standard Chartered Bank, says the increase in salary would have led to higher growth and inflation in normal times, but not in the current situation. “Though public sector employees don’t have to worry about job losses, they too will be cautious,” she adds.