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It was a good and upbeat Diwali festival shopping season for corporate India, in continuation of its improved performance, during the quarter ended September, 2016. India Inc has reported a much better performance, in the quarter, an evidence of green shoots of recovery.

Footfalls in the NavratriDiwali season were high and retail sales increased by 16 percent, with automobile sales being the cheerleader. The demand surged due to falling interest rates and inflation, the Seventh Pay Commission bounties doled out to the salaried class, and a copious monsoon that helped to reverse the past seven quarters of declining growth. Corporate growth in the September quarter was 6.9 percent, as against 2.9 percent, in the earlier quarter, led by the auto, cement, capital goods, metal, oil and gas sectors.

The bellwether corporates like Maruti Suzuki, Hero Motocorp, TVS Suzuki, JSW Steel, Reliance Industries, Bharti Airtel, Adani Ports and Grasim, helmed the corporate growth, with impressive quarterly results. The banking sector, however continued to reel under heavy bad debts, failing to mirror the sound growth of India’s corporates, as also its sound macro economic indices.

S&P forecasts India’s GDP growth at 7.9 percent in 2016 and an average growth of 8 percent in 201618, with inflation at about 5 percent, to support India’s impressive growth. With such encouraging trends, India looks to be the sole bright star in the large global economies and has thus seen a rush of foreign investors, eager to savour India’s growth story.

Amidst these shining indices, S&P, the global rating agency, reiterated/confirmed, India’s sovereign rating at BBB, the lowest investment grade rating, with a stable outlook and said that no rating upgrade was possible for India, for the next two years, citing weak public finances. S&P said in its review report that a stable outlook balances India’s sound external position and inclusive policy making tradition, against vulnerabilities stemming from its low per capita income and weak public finances. It said that, ‘the outlook indicates that we do not expect to change our rating on India this year or next, based on our current set of forecasts’. S&P outlined crucial factors for India’s economic success to include, higher growth in real per capital GDP, stronger fiscal and debt metrics, a stronger external position, improved monetary policy setting and the government’s ability to fulfil its promises on key reforms. S&P thinks that improvements in India’s weak fiscal balance sheet are likely to be gradual and is thus unlikely to lead to a rating upgrade in the next 35 years. The rating agency will closely watch the forthcoming Union Budget for pro growth measures, reforms for the power sector, and other areas of infrastructure, as well as fiscal consolidation. S&P’s statement invoked a sharp rebuke from the Indian government, which has been relentlessly pursuing reforms and growth. India indeed deserves a stronger rating due to improved economic fundamentals. The government said that the S&P rating, had a disconnect between the rating agencies and investor perception about India. It said that the radical reforms undertaken by India, Asia’s third largest economy, were unparalleled in any major economy and thus S&P’s decision to not upgrade, calls for introspection on its part. It cited various reforms undertaken in the last two years, including building a strong external position, controlling inflation and structural reforms such as the GST, bankruptcy code, liberalised FDI and curbed CAD. While S&P applauds India’s reforms, it seems to have adopted a wait and watch approach. India’s unprecedented economic reforms will give durable long term gains, but not without short term pains, which need deft political handling. Due to the demonetisation of high denomination currency, retail sales have collapsed and malls look abandoned. The sick real estate sector has slipped into coma. Ambit Capital has pruned India’s GDP growth forecast to 5.8%, as against its earlier estimate of 7.3 percent, reflecting S&P concerns and its rating caution.

akhilesh@akhilesh.ca akhilesh@arbco.ca