In this edition, we talk about how the latest salary hike for central government employees could help rev up demand in the economy. We also talk about the government’s push to support and regulate AI startups, and why IIFL Finance and JM Financial are facing regulatory heat.
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When you are in a good mood, or feeling rich, what do you do? You become generous.
This week, the central government was perhaps feeling all joyful and it decided to loosen its purse strings. It gave its employees and pensioners across the country a 4% hike in dearness allowance (DA) and dearness relief (DR). The hike is in addition to the 46% DA that government employees and pensioners get over and above their basic pay.
The decision will be implemented retrospectively from January 2024 and will cost the exchequer an additional Rs 12,869 crore. It will benefit more than 49 lakh central government employees and nearly 68 lakh pensioners. That’s nearly 1.2 crore families.
So, if you are a central government employee or a pensioner, you have all the reasons in the world to rejoice.
But the government went beyond just its employees, and decided also to spread some cheer among those who are not yet a part of the middle class. It extended the Rs 300 per cylinder subsidy on cooking gas under the Ujjwala scheme by a year at a cost of Rs 12,000 crore. It also announced a Rs 100 cut in the price of an LPG cylinder on the occasion of International Women’s Day.
Now, you may ask, while it may make for expedient politics, do these decisions make sound economic sense? If you ask us, we think they do. Government largesse, you see, puts extra money in the hands of lakhs of families, whose spending power goes up. This creates downstream demand, which, in turn, spurs both the manufacturing and services sectors, setting in motion a virtuous cycle.
In fact, the pay hike is likely to have an even greater domino effect. Oftentimes, pay hikes by the central government are closely followed by state governments raising salaries of their employees by an equal or comparable amount. If, and when that happens, it will put thousands of crores more in the hands of middle-class Indians.
And a consumption boost is exactly what the Indian economy needs to get on a sustained higher growth path.
Not all this money will, however, be spent on buying that latest gadget or that pricey gown or for taking an expensive vacation with the family. Middle-class Indians are now savvy and put a sizable chunk of their disposable incomes towards savings and investments. So, we totally expect some of this money to come into the stock markets, especially via mutual funds. And that can only be good news for all investors!
AI: Carrots and Sticks
Government babus and women homemakers were not the only ones that had a reason to rejoice. The Indian artificial intelligence (AI) startup community, too, could see some good times ahead.
This week, the Union Cabinet approved a Rs 10,372-crore India AI Mission that will provide funding for deep-tech startups. The mission seeks to develop an open-source database that can be used to train AI models and other applications. It will also provide a framework for developing graphic processing units (GPUs) under public-private partnerships as well as multi-model, domain-specific large language models that power generative AI platforms.
“A multi-faceted comprehensive framework has been created to bolster an AI-based solutions ecosystem in India,” Union minister of commerce Piyush Goyal said.
Interestingly, the announcement comes just days after the government issued an advisory asking “significant” tech companies to take its permission before launching new AI models. The advisory asked tech firms to ensure that their services or products “do not permit any bias or discrimination or threaten the integrity of the electoral process.”
Although the advisory is not legally binding, Minister of State for IT Rajeev Chandrasekhar said the notice signals that this is the future of regulation. “We are doing it as an advisory today asking you to comply with it,” he said.
This move towards regulating the nascent AI sector has taken several industry watchers by surprise and is a reversal from the Indian government’s earlier stand when it had adopted a hand-off approach to AI regulation and just last year, had declined to regulate AI growth, instead identifying the sector as vital to India’s strategic interests.
So, what do you think about this issue? Should the government regulate the AI sector?
Cracking the whip
While the central government is trying to regulate and incentivise the AI sector, the country’s banking and stock market regulators also had a busy week.
The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) put curbs on two of the country’s best known financial services firms—IIFL Finance and JM Financial. While the RBI banned IIFL Finance from giving out gold loans, JM Financial found itself in the crosshairs of both the regulators.
The central bank’s ban on IIFL Finance followed an inspection that revealed discrepancies in the company’s functioning in certain areas related to the gold loan portfolio. Essentially, the RBI noted “serious deviations” in certifying purity and net weight of gold at the time of loan sanctions, breaches of loan-to-value ratio, and significant disbursal and collection of loan amount in cash far in excess of the statutory limit.
Following the ban, the company’s share price tanked, hitting lower circuits of 20% on two consecutive trading days. The stock stabilized after a longstanding investor, Indian-born Canadian billionaire Prem Watsa’s Fairfax, committed $200 million in liquidity support to IIFL Finance.
Meanwhile, it was a double whammy for JM Financial. The company was first barred by the RBI from giving loans against shares and debentures, shutting the door on IPO financing. Soon after, SEBI barred the financial services firm from acting as the lead manager of any public debt issue. The SEBI order came after it investigated the public issue of non-convertible debentures in 2023 and noted the "shocking" manner in which subscriptions were managed.
The measures came after the RBI last week barred Paytm Payments Bank, an affiliate of fintech giant Paytm, from accepting fresh deposits.
But this may not be the end of the woes for financial services firms. Several analysts feel the crackdown on NBFCs is only likely to intensify in the coming days as the RBI steps up vigilance on firms engaged in equity markets financing.
Small change
Last month, SEBI raised concerns of froth building up in small-cap and mid-cap segments and the Association of Mutual Funds in India (AMFI) asked mutual funds to put in place safeguards to protect the interests of all investors in such funds. The warnings may have begun to make a little impact, going by data for February.
AMFI data this week showed that net equity mutual fund inflows in February rose 23.34% sequentially to Rs 26,866 crore. This is the highest monthly number since March 2022. Inflows into systematic investment plans (SIPs) touched a new peak of Rs 19,186 crore in February, AMFI data showed.
Small-cap schemes continued to receive the most inflows but the amount slowed to Rs 2,922 crore last month from Rs 3,257 crore in January. Inflows in mid-cap schemes fell 12.28% sequentially to Rs 1,808 crore while large-cap funds recorded net inflows for the second straight month.
Market Wrap
It was a truncated trading week with stock markets remaining closed on Friday for Maha Shivaratri. Still, the markets ended in the green for the fourth week in a row and benchmark indices scaled record highs.
The 30-stock Sensex crossed 74,200 while the Nifty 50 surged past 22,500 this week. Overall, the Sensex and the Nifty were up by 0.5% and 0.7%, respectively, during the week. The rally was led by financials as US Federal Reserve Chair Jerome Powell’s rate cut assurance supported sentiment.
Nifty stocks that led the rally included lenders such as IndusInd Bank and State Bank of India. Other counters, some of which gained even more than banks, included auto majors Bajaj Auto, Tata Motors and Hero MotoCorp, Tata Steel, HDFC Life, Bharti Airtel, Hindalco and Tata Consumer Products.
Stocks that ended the week in the red were Apollo Hospitals, Shree Cement, Infosys, Eicher Motors, SBI Life and Dr. Reddy’s Lab.
Other headlines
- Moody’s revises India GDP growth forecast for FY24 to around 8% from 6.6% earlier
- RBI tightens norms for credit, debit cards used with business accounts
- RBI asks credit card issuers to give users choice of selecting network
- Google restores Indian apps on Play Store after government criticism
- Bloomberg to add Indian bonds to emerging market debt indexes from January 2025
- China’s Antfin offloads Zomato stake worth $341.5 million
- SingTel sells 0.8% stake in Bharti Airtel to GQG Partners for $711 million
- Government to divest up to 7% stake in state-run coal miner NLC
- India to export 30% of its total smartphone production in FY24: ICEA report
- The number of foreign portfolio investors at GIFT City doubles in last four months, shows NSDL data
- India’s fuel demand rises 5.7% year on year in February thanks to strong factory output
- Singapore’s competition watchdog gives conditional approval to Air India-Vistara merger
- Torrent Power wins Rs 1,540-crore bid for 306 MW solar power project in Maharashtra
- Tata Motors to increase commercial vehicle prices from April, marking its second hike in 2024
- LTIMindtree appoints Vipul Chandra as CFO following Vinit Teredesa’s resignation
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