Indian civil service pay rise may spark consumer boom

Plan to double wages would be welcome stimulus to languishing stock market

RAJENDRA Diwakar, a bureaucrat in India’s commerce ministry, has been wanting to buy his wife a car, but with an annual salary of about $10 000 (R158 000) his wish has remained just that. Prime Minister Narendra Modi may soon offer him a helping hand.

Modi is weighing proposals by a panel to double civil service wages in a move that may prompt India’s 29 states to make similar adjustments. If accepted, the size of the stimulus could swell to as much as 4.8trillion rupees (about R1.1-trillion), or 2.8% of GDP, by March 2017, Credit Suisse estimates.

The first civil service pay rise in nearly a decade could be a windfall for India’s $1.4trillion stock market, which is 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 Niño-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”, said Vikas Gupta, an executive vicepresident at Mumbai-based Arthveda Fund Management. “[Next year] will be a year of consumption. There’s no question about it.” He favours makers of motorbikes and autoparts companies.

Shares of Maruti, the largest carmaker; HDFC Bank, the most valuable lender; Eicher Motors, which produces Royal Enfield motorcycles; and Asian Paints could return a combined 21% on average over the next 12 months, according to Rakesh Arora, head of research at Macquarie.

Incremental spending by as many as 34 million workers and pensioners was likely to be the highest on housing, processed foods and entertainment, Credit Suisse said in a November 30 report. Ultratech Cement, Hindustan Unilever and appliances maker Havells India were among companies that would benefit, the brokerage said.

The optimism is not without basis, if history is any guide. India last increased salaries in October 2008 with a raise of as much as 40%, one month after Lehman Brothers collapsed. The payout fuelled a 306% surge in an index of carmakers in the two years up to December 2010, while a gauge of consumer appliances tripled. The Sensex index doubled.

Local money managers are betting on a repeat. Motor and auto-parts companies made up 10.3% of the $62-billion that money managers held in equities as of October 30, up from 8.4% in April last year. Their stakes in consumer durables climbed to 1.4% from 1% in this period.

Increased consumption alone will not rescue Indian equities from waning global demand that has 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 emergingmarket assets.

“What’s happening globally is more worrying than India’s improving economic fundamentals,” said G Chokkalingam, MD of Mumbai-based Equinomics. “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 months. Private consumption growth may rise 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 Mumbaibased PNB MetLife India Insurance.

Although Diwakar’s job comes with a car and free housing, he says the prestige of being a civil servant is not enough when the economy is in the midst of a consumption boom. “More than perks, I need expendable income to meet the demands of this new lifestyle,” he said. “Hopefully, that will change soon.” — Bloomberg