India’s Seventh Pay Commission to boost demand in mini and compact cars

The recommendations of the Seventh Pay Commission, instituted by the government of India, are likely to result in almost 25 percent of central government and 20 percent of state government employees becoming eligible car buyers, i.e., monthly pay of Rs 40,000 a month. This would make almost 3 million employees a target segment for entry level small and hatchback cars and utility vehicles.

Assuming a 10 percent conversion rate, it would mean sales of an extra 300,000 units per annum which in turn would translate into an extra 10 percent growth for the domestic passenger car industry. It is likely that the Seventh Pay Commission’s recommendations will be implemented from August 2016 onwards.   

It may be noted that the Sixth Pay Commission, which was implemented in August 2008, resulted in almost a 10-fold increase in Maruti Suzuki India’s sales to government employees from FY08 to FY12. The share of sales to government employees rose in this period from 2 percent to 15 percent of sales. 

The past five years have also seen Maruti Suzuki, the country’s largest carmaker, make a conscious effort to reach out to rural buyers and has gradually seen its share of rural sales increase from 5 percent to 33 percent. Among state government employees, the typical buyer profile in rural India includes people sich as teachers for whom the carmaker had developed a special sales package.

In a Credit Suisse research report, it is mentioned that the Sixth Pay Commission had a very positive impact on demand for both the two-wheeler and four-wheeler domestic market.

Along with Maruti Suzuki, expect most of its rivals with entry level cars to dangle attractive offers to woo government employees next year. Likewise, on the two-wheeler front, commuter bike manufacturers, most of whom are experiencing a slowdown in rural sales, will look to derive new volumes from government staffers.