India’s $13 Billion Pay Rise Seen Lifting Oil Demand on New Cars

(Bloomberg) -- India's $13 billion pay increase for federal employees will boost car and motorcycle purchases, increasing fuel use in a country with the world's fastest oil demand growth.

Prime Minister Narendra Modi's cabinet this week decided to increase salaries for federal government employees resulting in a payout of roughly 849 billion rupees ($13 billion) for 4.7 million workers and 5.2 million pensioners in the year through March 2017. The move is seen as a boon for auto sales, which have been the driving force behind the country's accelerating oil consumption.

“There will be lot more activity,” S. Varadarajan, chairman of India's second-largest oil marketing company Bharat Petroleum Corp., said in phone interview. “Two wheeler sales will go up, cars will go up. So automatically all these will lead to an increased usage of vehicles, which will ultimately reflect in higher demand.”

India's fuel demand grew 11 percent in the year ended March, the quickest pace in records going back to 2001. The country is expected to surpass Japan as the world's third-largest oil user this year and will be the fastest-growing consumer through 2040, the International Energy Agency estimates. India is forecast to use 4.34 million barrels a day of oil this year, compared with 19.6 million in the U.S. and 11.7 million in China, the IEA said in its latest monthly market report.

Auto Performance

“This augurs well for the automotive sector, which is now hoping for a much better performance in the coming months as compared to the last three years,” said Sugato Sen, deputy director of the Society of Indian Automobile Manufacturers.

Before factoring in the impact from pay increases, total oil product demand was already seen growing as much as 8 percent this fiscal year, according to BPCL's Varadarajan. Gasoline demand was expected to expand as much as 12 percent and diesel as much as 6 percent this fiscal year, he said.

“Definitely these companies will benefit,” said Sudeep Anand, an analyst at IDBI Capital Market Services Ltd, referring to BPCL, Indian Oil Corp., and Hindustan Petroleum Corp. “Once the economy picks, we will see some surge in demand.”

--With assistance from Siddharth Philip To contact the reporter on this story: Saket Sundria in Mumbai at ssundria@bloomberg.net. To contact the editors responsible for this story: Ramsey Al-Rikabi at ralrikabi@bloomberg.net, Aaron Clark