India’s Consumer Price Inflation remains record low.

As expected the Consumer Price Index for the month of January 2017 touched a new low. The CPI for January 2017 was 132.4 down 0.4 points from that of December 2016. Rate of CPI inflation in January was 3.17% much less than 5.69% seen in January 2016.
According to Deepak Talwar of DTA Consulting the primary reason for the fall in CPI has been sharp fall in food prices.”
Consumer Food Price Index (CPFI) rose just be 0.56% in January 2017 compared to 6.85% rise in January 2016.
“The effect of demonetisation”, said Deepak Talwar, “resulted in fall in perishable food items. Evidently deprived of liquidity middle men could not store food products which led to distress sale by farmers.”
But non-food non-fuel core inflation was up. In addition crude oil prices increased due to production cut by producing nations.
Quoting analysis by DTA Consulting its principal Deepak Talwar said, “In view of the hardening core inflation and upward pressure on oil prices Reserve Bank of India decided to leave policy rates unchanged.”
Evidently the commercial banks, flush with deposits, post demonetisation, will have to cut loan rates in order to attract borrowers. “Even RBI Governor is asking banks to pass on the benefits of earlier policy rate cuts to borrowers”, said Deepak Talwar.

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The first combined Budget of Independent India, spelt out a brand new template for Indian Railways. Transport integration and making the railways a competitive mode of commuting really headlined the announcements.
The budget has allocated Rs. 1,31,000 crores to Indian railways for this year with a focus on four major areas; passenger safety, capital and development works, cleanliness and finance and accounting reforms.

A ‘Rashtriya Rail Sanraksha Kosh’ for passenger safety, will be created with a corpus of Rs.1 lakh crores over a period of 5 years, to be funded by seed capital from the Government, Railways’ own revenues and other sources. Expert international assistance will be harnessed to improve safety preparedness and maintenance practices.

Talking about the proposed steps for modernization and upgradation of identified corridors, the Finance Minister said that Railway lines of 3,500 kms would be commissioned in 2017-18. and steps would be taken to launch dedicated trains for tourism and pilgrimage. In the next 3 years, the throughput is proposed to be enhanced by 10%. Further, the Minister added that Railways have set-up joint ventures with 9 State Governments and 70 projects have been identified for construction and development.
According to DTA Consulting principal Deepak Talwar “The move to make Indian Railways both competitive with other modes of transport and integrating it into the larger federal scheme is a very bold move as it will herald a new era in connectivity across the length and breadth of India for both goods and people”
At least 25 stations are expected to be awarded during 2017-18 for redevelopment and 500 stations will be made differently abled friendly by providing lifts and escalators. It is also proposed to feed about 7,000 stations with solar power in the medium term, of which, a beginning has already been made in 300 stations. Works will be taken-up for 2,000 railway stations as part of 1000 MW solar mission.

By 2019, all coaches of Indian Railways will be fitted with bio toilets. Pilot plants for environment friendly disposal of solid waste and conversion of biodegradable waste to energy are being set-up at New Delhi and Jaipur Railway Stations and five more such Solid waste management plants are now being taken-up.

Some other steps to be introduced include:
• End to end integrated transport solutions for select commodities through partnership with logistics players, who would provide both front and back end connectivity. Rolling stocks and practices will be customized to transport perishable goods, especially agricultural products.
• Competitive ticket booking facility to the public at large. Service charge on e-tickets booked through IRCTC has been withdrawn.
• As part of accounting reforms, accrual based financial statements will be rolled-out by March 2019. The aim is to improve the Operating Ratio of the Railways. Tariffs of Railways would be fixed, taking into consideration costs, quality of service, social obligations and competition from other forms of transport.
• A new Metro Rail Policy will be announced with focus on innovative models of implementation and financing, as well as standardization and indigenization of hardware and software. This will open-up new job opportunities for our youth. A new Metro Rail Act will be enacted by rationalizing the existing laws. This will facilitate greater private participation and investment in construction and operation.

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The Budget has provided Rs 10,000 crore for recapitalisation of banks in 2017-18. But what is reassuring is the FM’s statement that need based additional allocation would also be considered, emphasising focus on the resolution of stressed legacy accounts.

The Government also announced several Public Sector Undertaking (PSU) reforms, like revised mechanisms and procedures to ensure time bound listing of identified Central Public Sector Enterprises or CPSEs on the stock exchanges. This will foster greater public accountability and unlock the true value of these companies.
Additionally, CPSEs will be integrated across sectors through consolidation, mergers and acquisitions. This will give them capacity to bear higher risks, avail economies of scale, take higher investment decisions and create more value for the stakeholders. DTA Consulting principal Deepak Talwar hailed this decision, “This is a much delayed and much needed step.”
Sectors such as oil and gas, the Finance Minister indicated is a focus area. Here, the Government proposes to create an integrated public sector ‘oil major’ which will be able to match the performance of international and domestic private sector oil and gas companies.
The budget also announced that 3 Rail Public Sector Enterprises (PSEs) like IRCTC, IRFC and IRCON would be listed in the stock markets. The Finance Minister said that the Exchange Trade Fund (ETF), comprising shares of ten CPSEs, has received overwhelming response in the recent Further Fund Offering (FFO). The Government will continue to use ETF as a vehicle for further disinvestment of shares. Accordingly, a new ETF with diversified CPSE stocks and other Government holdings will be launched in 2017-18.
Dealing with the markets, high net worth NBFCs can also now participate in IPOs just like the banks and insurance companies. Systemically important NBFCs regulated by RBI and above a certain net worth would be categorised as Qualified Institutional Buyers (QIBs) by SEBI at par with the banks and insurance companies, making them eligible for participation in IPOs with specifically earmarked allocations. This will strengthen the IPO market and channelize more investments.

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Giving an impetuous to the Prime Minister’s primary focus to make India an attractive investment destination, the Union budget made a case for removing bureaucratic bottlenecks that held back foreign entities from setting up here.
The one major announcement being that the Foreign Investment Promotion Board (FIPB) will be phased-out in the next fiscal. Stating that the Government has already undertaken substantive reforms in FDI policy in the last two years and more than 90% of the total FDI inflows are now through the automatic route, the Finance Minister in his budget speech said that the FIPB has successfully implemented e-filing and online processing of FDI applications and has now reached a stage where it can be phased out. Therefore, FIPB will be abolished in 2017-18.
According to policy analyst Deepak Talwar from DTA Consulting, “The ‘Ease of Doing Business’ in any country is not merely about regulations/laws, but also a factor of the bureaucratic dispensation, and with the FIPB being phased out, this will have far reaching consequences for creating a business-friendly environment to meet consumer demand.”
Several other measures were proposed to carry on the Government focus on easing business conditions in the country.
1. The threshold limit for audit of business entities that opt for presumptive income scheme has been raised from Rs. 1 crore to Rs. 2 crore.
2. Similarly, the threshold for the maintenance of books for individuals and HUF is now increased from turnover of Rs. 10 lakhs to Rs. 25 lakhs or income from Rs. 1.2 lakhs to Rs. 2.5 lakhs.
3. Foreign Portfolio Investor (FPI) Category I & II will be exempt from indirect transfer provision under the IT Act. Besides, indirect transfer provision shall not apply in case of redemption of shares or interests outside India as a result of or arising out of redemption or sale of investment in India which is chargeable to tax in India. This will remove apprehensions over taxation upon transfer of stake of investors of India-based funds located abroad but investing in India-based companies.
4. Professionals with receipt up to Rs. 50 lakhs p.a. can pay advance tax towards presumptive taxation in one instalment instead of four.
5. In effort to improve the ease of doing business, the Finance Minister said the process of registration of financial market intermediaries like mutual funds, brokers, portfolio managers, etc. will be made fully online by SEBI. Steps will be taken for linking of individual demat accounts with Aadhar.

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Taking a cue from the aftermath of demonetisation, the Finance Minister while presenting the Union budget admitted, that the present tax burden on honest tax payers and salaried employees is unfair.
A crack down on the dishonest and the corrupt and rewarding the honest tax payers, therefore became a centrepiece of the Budget which proposed a slew of measures. For example:
1) If an accountant or merchant banker or registered valuer, furnished incorrect information in a report or certificate, he or she shall be liable to a penalty of Rs 10000 for every such default.
2) A grant of interest in case of refund of excess payment of TDS. At the same time, to ensure timely filing of returns of income, a fee will be levied in case of delay in filing the return.
3) The Government is trying to also broaden the personal income tax next and in this direction reduced the Income Tax rate from 10 to 5 per cent for small taxpayers. At the same time, it imposed a 10% surcharge on taxable income of Rs 5 million.
4) Another proposal is that no person shall receive payment or aggregate of payments of an amount of Rs 3 lakh or more from a person in a day, or in respect of a single transaction, or in respect of transactions relating to one event or occasion except by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account. Contravention of this provision will invite penalty.
Says DTA Consulting principal Deepak Talwar “The push towards greater transparency and tax compliance if implemented well, will ultimately result in improving the economic infrastructure of the country.”
Pointing out that there is an urgent need to protect the poor and gullible investors from dubious deposit schemes, operated by unscrupulous entities, the Finance Minister said that a draft bill to curtail the menace of illicit deposit schemes has been placed in the public domain and will be introduced in parliament shortly after its finalisation.
This Act will be amended in consultation with various stakeholders, as part of our ‘Clean India’ agenda, he added.

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The much-awaited Union Budget for 2017-18 turned out to be less exciting and more pragmatic. As expected the budget deferred any major changes on indirect taxes to a later date, when GST will be introduced, instead making only cosmetic changes to direct tax rates.
The overall focus continued to be on the ease of doing business and an increase in the GDP growth rate.
The two headline grabbing steps announced in the budget are: (a) Reform of electoral funding of political parties and (b)Disbanding of FIPB, the body clearing foreign investment proposals, with the latter impacting potential foreign investors.

The budget was placed in the back drop of sudden cancellation of two high value currency notes in November last year and the resultant adverse impact on GDP growth rate in the short term. However, the remonetisation of currency that were withdrawn from circulation has now nearly complete. The adverse effect, as per the budget, will not affect the economy in the financial year 2017-18.
Policy analyst Deepak Talwar from DTA Consulting stated that the “Overall the budget had a positive impact on the capital markets and seemed to lend credence to the Government’s fiscal objectives, as well as its desire to keep GDP growth rate highest among the large global economies.”
In addition, the agreement reached on the contentious issues over introduction of GST will help the economy during the year.

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RBI decides to remain cautious, leaves rates unchanged.

In the sixth and final bimonthly monetary policy for 2016-17, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) changed its stance from accommodative to neutral. The policy rates, therefore, were kept unchanged. RBI decided to wait and assess how the transitory effect of demonetisation on inflation and output gap play out.
Deepak Talwar, Principal of DTA Consulting said, “A rate cut at this juncture would have perhaps acted merely as sentiment booster for investors but would not have been a necessary or sufficient incentive to turn more bullish than what it is now.”
“A rate cut would not have changed anything fundamentally for the borrowers,” said Mr. Talwar.
Interest rates, Deepak Talwar pointed out, have moved lower with banks passing on the benefits of previous rate cuts by RBI. “Flushed with funds after demonetisation”, said Principal of DTA Consulting, “banks reduced interest rates. RBI action on policy rate was, therefore, not expected.”
Repo rate, the key policy rate used by RBI, remains unchanged at 6.25%, Bank Rate and Marginal Standing Facility rates at 6.75%.
According to Deepak Talwar RBI was judicious in its assessment of the economy. Taking into account the short term problems the economy faced after demonetisation RBI reduced GVA growth forecast for fiscal 2016-17 to 6.9% , nearly one percent less than 7.8% predicted by India’s Central Statistics Office last year. However in view of the success in remonetising and keeping into account the pickup in manufacturing sector activity RBI predicted growth rate of 7.4% during 2017-18. “This is a fair assessment”, said Deepak Talwar.
MPC of RBI flagged certain issues for turning neutral from accommodative in its policy stance.
First and critical most is the fact that prices now remain sticky with further downward move looking unlikely. The lower food prices due to seasonal factors and also some distress sale of perishables due to demonetisation kept CPI at less than 5% for the quarter but this is not expected to last long.
Second, the global commodity prices are firming up due to expected boost of infra spending in USA and also reduction in oil production causing rise in crude prices. The Indian economy will face price pressure in coming months.
Third and no less critical is uncertain global scenario. The complex political development and protectionist tendencies seen might impact the Indian economy adversely. There may be pressure on rupee exchange rate also.
“RBI was justified in maintaining caution in view of these factors”, felt Talwar. “However for the Indian economy there are several positive factors as well”, said Principal of DTA Consulting.
The remonetisation process has put back liquidity to the consumers. This will increase discretionary spending. “Service sector which suffered due to demonetisation, will get boosted”, said Talwar.
Secondly demonetisation brought in liquidity to the banking system which made banks reduce lending rates. “What RBI rate cuts earlier could not do, demonetisation did at last”, commented Talwar.
Third and no less important is the Union Budget 2017-18 stepped up capital expenditure, provided support to affordable housing and also rural economy. The GVA in 2017-18 is expected to receive a boost. RBI predicted a 7.4% growth rate in the next financial year, 0.5% more than the estimated growth rate of 6.9% in 2016-17.
“Economy can no longer bank of monetary policy to stimulate growth. A lot will now depend on administrative efficiency and introduction of GST”, summed up Deepak Talwar.

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India bites the bullet: Drastic measure to curb black money

The World Bank in July, 2010 estimated the size of India’s shadow economy at 20.7% of the GDP in 1999 and rising to 23.2% in 2007. The parallel shadow economy corrodes and eats into the vitals of the country’s economy. It generates inflation which adversely affects the poor and the middle classes more than others. It deprives Government of its legitimate revenues which could have been otherwise used for welfare and development activities.
Reasons for the drastic step
The Government had taken the drastic step to

  • Curb financing of terrorism through the proceeds of Fake Indian Currency Notes (FICN)
  • Use of fake notes for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India,
  • Eliminate Black Money which casts a long shadow of parallel economy on India’s real economy.

The Government cancelled the legal tender character of the High Denomination bank notes of Rs.500 and Rs.1000 denominations issued by RBI till now. This came into effect from the midnight of 8th November, 2016.
Fake Indian Currency Notes in circulation in these denominations are comparatively larger as compared to those in other denominations. For a common person, the fake notes look similar to genuine notes. Fake notes facilitate financing of terrorism and drug trafficking.
High denomination notes are used for storage of unaccounted wealth. In addition high denomination notes facilitate generation of black money. This may be evident from the fact that while the total number of bank notes in circulation rose by 40% between 2011 and 2016, the increase in number of notes of Rs.500/- denomination was 76% and for Rs.1,000/- denomination was 109% during this period.
The Government as advised by the Reserve Bank of India will issue new Two thousand rupee notes and new notes of Five hundred rupees for circulation. Notes of one hundred, fifty, twenty, ten, five, two and one rupee will remain legal tender and will remain unaffected by the decision. A detailed process of exchange of demonetized notes from banks has also been announced.

Measures for disclosure of Black Money
The Government had passed a law in 2015 on disclosure of foreign bank accounts. In August 2016 strict rules were put in place to curtail benami transactions. During the same period a scheme to declare black money was introduced. In addition the Prime Minister had raised the issue of black money seeking safe haven in different global forum. The efforts have borne fruit. Over the past two and a half years, more than Rs. 1.25 lakh crore (Rs 1.25 trillion0 of black money has been brought into the open.
Impact of demonetization
In one swift decision the Government has flushed out the huge cache of black money and also fake notes from the system. The immediate impact will affect smooth trade and business in the country. There may even be shortage of legal tenders till banks push in the new currency notes into the system. The injection of liquidity into the system to keep retail continue at a robust rate is a challenge to the system.
Over the longer term real estate prices in India, notorious for undervaluing and transacting in cash will come down with the cash element flushed out. Coupled with judicious taxation policy the Government can bring the real estate sector at par with advanced global economies. Price of real estate will also come down to represent the real economy with the black economy now erased.
The political parties and their leaders, notorious for encouraging creation and circulation of black money will be the biggest losers. This will cleanse not only the economy but the administrative process also. Indian economy will come stronger on the transparency parameter than it was earlier.
Gold is another commodity where Indians hide their ill-gotten wealth. The strike on black money and expected tightening up of the retail trade will ensure less demand for gold. Since India is a major importer of gold India’s import bill will come down.
The transparency will boost real economy. Pressure on inflation will come down. Hoarding and black marketing of commodities will be checked. This will raise collection of tax by the exchequer. The higher revenue collected will induce better rating of India since the debt to GDP percentage will come down.
Deepak Talwar, Principal of DTA Consulting said, “The rupee will remain stable or strengthen in the exchange market. With less pressure on inflation the interest rates are expected to come down. On the whole demonetization move will help the Indian economy though a lot will depend on the efficiency of the local and national administration.”

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GST rate structure finalized

Overcoming many hiccups India’s GST Council has moved a step closer to introduce the Goods and Services Tax from the next financial year beginning April 1st 2017. The council has agreed on the GST rate structure. The tax rates would range from 5 to 28 percent, with two intervening standard rates of 12 percent and 18 percent. Deepak Talwar, Principal of DTA Consulting felt that though the rates seemed too many “to begin with this is a good step forward”.
The fine tuning of fitment of items under each head will be worked out by a Committee of Secretaries and officials. They will align the products in synchronization with the current tax rates. The GST Council headed by the Union Finance Minister Arun Jaitley and attended by the finance ministers of the States has finalized the rate structure and given the broad guidelines for the officials to decide on the fitment of items.
The broad rate structure is as under:
Around 50% of the items that form part of the consumer price index basket (such as daily food consumption items) will not be taxed at all under GST.
5% tax rate for mass consumption goods like butter, ghee as also common man’s daily use items– While the lists are yet to be rolled out by the GST Council, all essential commodities and services, including education and health care should feature in the list of special concessional rate of 5% (if not zero rated).
12% standard rate – but there has not been any hint even on which goods will fall in this category. It is expected that many mass consumption items will fall in this slab.
18% standard rate – this will be applied on services. The current rate of service tax is 15% inclusive of two cess charged. This will go up. But certain items like soaps, oil, shaving sticks etc. will be cheaper due to lower tax.
28% is the highest slab and will be applicable on cars, white goods. There will be cess on luxury cars, tobacco products, pan masala, aerated drinks and also clean energy cess on coal. The items where cess will not be charged – certain cars, white goods will be cheaper. The cess will be used to compensate loss of revenue of certain producing states due to introduction of GST.
There will be separate rate for gold and precious metals – the rate will be decided later.
The Impact of GST
Inflation – is expected to be lower since most mass consumption items will be charged at lower rates or nil rates. “There will be inflationary effect of higher service tax but the same is expected to be more than neutralized by less charges on mass consumption items,” said Deepak Talwar. According to India’s Chief Economic Adviser Arvind Subramanian on average this should probably serve to lower inflation.
Revenue – most states are expected to earn higher revenue due to larger pool of taxes. States without much manufacturing base, like Bihar, West Bengal, will gain. But manufacturing states like Gujarat, Maharashtra, Tamil Nadu will lose. The estimated loss will be compensated by cess which is expected to yield Rs 50,000 crore ( Rs 500 billion). Such compensation will apply for five years and after four years GST Council will decide if the same will continue or not.

Way Ahead
The Committee of officials will have to work out the details of fitment of products. The same will then be approved by the national Parliament and State Legislatures.”We may see another round of tough negotiation at this stage”, said Talwar.
There will be hectic representations from various industry bodies particularly for fitment of products. The 12% and 18% bracket has kept the options of such pulls and pressures open. How a consensus is reached by the officials will be watched keenly.
The Council need to clear the proposed legislations for the final enactment of GST. Once the same is approved by India’s Parliament and State legislatures GST will be implemented. The Government is hopeful that the new one tax structure for the entire country will come into effect from April 1st 2017.

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India’s Rating Dilemma

That rating agencies, often enough, are more conservative while rating a developing economy than doing the same for a developed western economy was reiterated, not in so many words though, by India’s Economic Affairs Secretary Shaktikanta Das. Das felt that the decision of S&P not to upgrade India’s rating called for “introspection” on the part of the rating agencies. S&P maintained the lowest investment grade rating of ‘BBB-‘ with a ‘stable’ outlook for India. It cited India’s sound external profile and improved monetary credibility but advocated more efforts to lower government debt to below 60 per cent of the GDP. S&P also did not expect revenues to raise enough to meaningfully lower the deficit over the medium term. What is more, S&P said, “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.”

According to Deepak Talwar Principal of DTA Consulting there is elements of truth in what Das said.

SBI Analysis on Rating Bias

A couple of months back India’s largest bank State Bank of India’s Economic Research Department did a detailed analysis of the foreign currency long-term sovereign ratings given by three major rating agencies, namely S&P, Moody’s and Fitch, for a group of 20 countries for the decade ended 2015. The research team constructed a rating migration matrix for the entire period. The rating migration matrix summarized changes in sovereign credit ratings over the given time horizon across different rating grades. The idea was to understand how liberal rating agencies are in terms of rating upgrades and downgrades.
Deepak Talwar drew attention to this, “The results were an eye opener.” It was found that the countries with the highest rating (AAA) have the greatest probability of retaining the same rating (96 per cent), even though these have witnessed considerable turmoil during 2006-2015. Developed nations fall into this category and it seems that in the absence of creation of new havens of certainty, the rating agencies have kept their rating constant so that the system is not destabilized further. One may recall that the rating agencies faced severe criticisms when they rapidly downgraded Eurozone countries owing to the Euro debt crisis. Agencies, it was said, were adding fuel to fire.
Despite attention to the emerging economies in the public domain (countries in the range A- to BB+) their ratings have not changed much even after improvement in their macroeconomic performance. A case in point is India, which has remained stuck in BBB- category despite its better performance relative to other emerging market economies.
India’s growth was affected during the global crisis of 2008 but the economy showed resilience and recovered soon after. Since 1992, on a net basis (upgrades adjusted for downgrades) India has witnessed only a solitary rating upgrade. In 1998 India was downgraded from BB+ to BB even though growth rate was high by 200 basis points. Reason unstated was Pokhran blasts. Subsequently, India was upgraded to BB+ in 2005 and BBB- in 2007. As per the SBI study with BBB- rating India has only a five per cent probability of a rating upgrade.
The unavoidable conclusion is that the rating agencies adopt different criteria while rating a country as is evident from the SBI study of the changes in ratings of developed and developing countries. The developed countries have occupied the top notches and have hardly seen any downgrades despite slippage in macros. In contrast, the developing countries have witnessed larger number of downgrades accompanied by fewer upgrades and that too in the lowest brackets

Views of Rating Agencies

Das has reasons to feel unhappy with the S&P bias. In this S&P is not alone. In September, Moody’s, had said that a ratings upgrade for India would not be possible before the next couple of years. This was just ahead of the agency’s representatives meeting finance ministry officials. Indian policymakers were miffed at Moody’s making such statements even before meeting them. Das had told the representatives that he had serious concerns regarding the agency’s methodology. He told them that, under the circumstances, the meeting was “completely irrelevant and superfluous”.
S&P in its latest rating exercise expects Indian economy to grow 7.9 per cent in 2016 and eight per cent on an average over 2016-2018. It also expects current account deficit to be at 1.4 per cent of the GDP in 2016 and the Reserve Bank of India to meet its inflation target of five per cent by March 2017. But the agency was stuck at Government debt stuck at 69% of GDP, higher than 60% ceiling the agency holds as sacrosanct.

Recent Economic Performance 

Deepak Talwar pointed out that the performance of India tells a different story than the rating agencies stick to. Early results from 510 corporates, however, indicate that growth is coming back after seven consecutive quarters of decline. It seems that increased demand for products ahead of the festival season, the Pay Commission hikes and a good monsoon are helping corporate India’s fortunes. However the large companies have yet to come out with their results.
In addition the Nikkei India Manufacturing Purchasing Managers’ Index has hit a 22-month high. There has been higher auto sales in October. All these indicate better prospects for the economy. What is more, the core sector grew 5 per cent in September 2016, up from the 3.7 per cent in September 2015. Add the falling inflation and recent RBI interest rate cuts and rise in non-food credit there are reasons for positive sentiment.
The decision of the rating agencies to keep India’s rating unchanged and also just one notch improvement in the World Bank’s Ease of Doing Business Index (from 131 to 130) are two dampeners to the mood of the Government. Evidently India needs to work further and wait longer to win over the external judges to certify the good works done.

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