Modi's 72b wage bonanza spells stimulus for stocks

Date

12/11/2015 11:33:21 PM

(MENAFN- Khaleej Times)

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 $10000 his wish has remained just that. Prime Minister Narendra Modi may soon offer him a helping hand.

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 Rs4.8 trillion ($72 billion) or 2.8 per cent 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 $1.4 trillion 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 can return a combined 21 per cent on average over the next 12 months according to Rakesh Arora the head of research at Macquarie.

Incremental spending by as many as 34 million 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 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 per cent a month after Lehman Brothers Holdings collapsed. The payout fuelled a 306 per cent 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 per cent of the $62 billion they held in equities as of October 30 up from 8.4 per cent in April 2014 data from the regulator show.

Their stakes in consumer durables climbed to 1.4 per cent from one per cent in this period. Maruti Suzuki is the best-performing stock on the Sensex this year while Asian Paints has climbed 14 per cent. The 30-stock gauge fell 0.8 per cent at the close in Mumbai capping a second weekly drop.

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