Fatter salaries could potentially boost spending on cars, houses

The 23.5% average hike in salaries and pension can potentially set off a cycle of spending and investment, with central government employees expected to use part of their higher wages to buy cars and houses.

While there are green shoots of consumption demand picking up, the government would be hoping that the pay hikes will prompt people to spend more and aid budding signs of revival in the broader economy. Latest industrial output data suggest that factories are not producing goods and people are not buying at a pace fast enough to push growth.

Industrial output growth — the closest approximation to measure production activity among thousands of factories — fell to a four-month low of 3.6% in September pulled down by a muted manufacturing and consumer non-durables sector.

“Since the pay hikes are a boost government employees’ disposable income, they have historically boosted consumer discretionary demand,” broking and research firm Nomura said in a research note. “A category-wise breakdown of consumption shows discretionary spending on automobiles, clothing and expenditure on education have historically risen in the years following previous pay commissions,” Nomura said.

The last such comprehensive hike in salaries did lead to a sharp vault in consumer spending.

Car and two-wheeler sales, for instance, recorded a sharp sales surge shortly after the sixth pay commission payouts. The sixth pay commission report was submitted in 2008, with the higher salaries coming into effect retrospectively from January 1, 2006. This entitled them to arrears of about ` 27,000 crore, part of which was spent in cars and houses.

Passenger vehicle sales vaulted nearly 20% in 2008-09 and by nearly 22% the next year.

CAR AND TWO-WHEELER SALES, FOR INSTANCE, RECORDED A SHARP SALES SURGE SHORTLY AFTER THE SIXTH PAY COMMISSION PAYOUTS