The Bombay Stock Exchange (right) is seen behind the Bombay High Court building in Mumbai. The first civil service pay rise in a decade can be a windfall for India’s $1.4tn stock market that’s headed for its first annual loss in four years.

Bloomberg
Mumbai

Prime Minister Narendra Modi’s weighing proposals by a panel to double wages in a move that may prompt the country’s 29 states to make their own adjustments. If accepted, the size of the stimulus could swell to as much as Rs4.8tn ($72bn), or 2.8% of gross domestic product by March 2017, Credit Suisse Group estimates.
The first civil service pay rise in a decade can be a windfall for India’s $1.4tn stock market that’s headed for its first annual loss in four years. The higher payouts may boost the fortunes of companies from Maruti Suzuki India to broadcaster Zee Entertainment Enterprises at a time when El Nino-linked dry weather curbs rural incomes, according to Macquarie Capital Securities India and Credit Suisse.
The panel’s proposals “will put a lot of money in the hands of consumers in one shot,” Vikas Gupta, an executive vice president at Mumbai-based Arthveda Fund Management, said by phone. “2016 will be a year of consumption. There’s no question about it.” He favours two-wheeler makers and auto-parts companies.
Shares of Maruti, the largest carmaker, HDFC Bank, the most valuable lender, Eicher Motors, which produces Royal Enfield motorcycles, and Asian Paints Ltd, can return a combined 21% on average over the next 12 months, according to Rakesh Arora, the head of research at Macquarie.
Incremental spending by as many as 34mn workers and pensioners is likely to be the highest on housing, processed foods and entertainment, Credit Suisse said in a November 30 report. Ultratech Cement, Hindustan Unilever Ltd and appliances maker Havells India are among companies that will benefit, the brokerage said.
The optimism is not without basis, if history is any guide.
India last increased salaries in October 2008 for a raise of as much as 40%, a month after Lehman Brothers Holdings collapsed. The payout fuelled a 306% surge in an index of automakers in the two years through December 2010, while a gauge of consumer appliances tripled. The Sensex doubled.
Local money managers are betting on a repeat. Auto and auto-parts companies made up 10.3% of the $62bn they held in equities as of October 30, up from 8.4% in April 2014, data from the regulator show. Their stakes in consumer durables climbed to 1.4% from 1% in this period. Maruti Suzuki is the best-performing stock on the Sensex this year, while Asian Paints has climbed 14%. The 30- stock gauge fell 0.8% at the close in Mumbai, capping a second weekly drop.
Increased consumption alone won’t rescue Indian equities from waning global demand that’s pushed commodities from oil to copper to multi-year lows, according to Equinomics Research. The Sensex has slumped about 15% from its January 29 record as global funds bought the least amount of shares since 2011 amid cooling demand for emerging-market assets.
“What’s happening globally is more worrying than India’s improving economic fundamentals,” Chokkalingam G, managing director at the Mumbai-based Equinomics, said by phone. “We’re facing problems due to the global slowdown and falling exports.”
Bulls say the stimulus could not have come at a better time: credit growth is hovering near a 20-year low and exports have fallen for 11 straight months. Private consumption growth may expand 80 basis points to 8.6% in the year starting April 1, according to Nomura Holdings.
“Urban consumption’s growth trajectory will get a further stimulus,” said Sanjay Kumar, chief investment officer at Mumbai-based PNB MetLife India Insurance Co, which has $2bn in assets. “Urban demand is being driven by the upturn in the economy and higher purchasing power due to falling inflation.” He favors carmakers, mortgage providers and entertainment companies.
While Diwakar’s job comes with a car and free housing, he says the prestige of being a civil servant isn’t enough when the economy is in the midst of a consumption boom. Central bank data shows personal loans rose 17% in October from a year earlier, while vehicle loans rose 14%, the data show.
“More than perks, I need expendable income to meet demands of this new lifestyle,” he said. “Hopefully, that will change soon.”