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Enhanced public spending, lending rate cuts can prop up growth: Experts

At present, India's economy faces a severe demand slowdown on account of high GST rates, farm distress, stagnant wages and liquidity constraints

IANS  |  New Delhi 

GDP growth

Enhanced public spending for infrastructure creation along with further reduction in lending rates and better transmission can accelerate India's GDP growth, economy watchers opined.

The suggested steps to infuse vitality into the economy assume significance as India's second quarter FY2019-20 GDP growth rate is widely expected to fall below the 5 per cent mark.

The National Statistical Office (NSO) will release the second quarter GDP numbers on Friday, November 29.

At present, India's economy faces a severe demand slowdown on account of high rates, farm distress, stagnant wages and liquidity constraints.

Consequently, all the major sector's including automobile, capital goods, banks, consumer durables, FMCG and real estate have been heavily battered.

In terms of production, the output of manufacturing, mining and electricity generation among others have plunged causing job losses.

This trend of subdued consumption, referred to as slowdown had pulled the country's GDP growth rate lower to 5 per cent in the first quarter of FY 2019-20 from 5.8 per cent in Q4 of FY 2018-19.

"A counter-cyclical fiscal stance would help alleviate some of the growth pains, with the immediate multiplier effect being higher if its focused on the revenue spending," Edelweiss Securities' Economist Madhavi Arora told IANS.

"However, the extent of growth up-tick owing to higher fiscal spending will be contingent on the extent of deficit slippage."

Recently, Finance Minister Nirmala Sitharaman announced several measures to boost the economy, including mega bank merger, sops for the auto along with real estate sectors and reducing effective corporate tax rate to 25.17 per cent (inclusive of all cess and surcharges) from 30 per cent for all domestic companies.

According to Suman Chowdhury, President-Ratings, Acuite Ratings and Research, public investment would be the key to a quick revival of the economy.

"The fiscal challenges notwithstanding which have further aggravated in a slowdown phase, the government should accelerate its investment plans particularly in the infrastructure sector," Chowdhury said.

"Private investment pick-up will happen only when there is a clear revival in the demand scenario brought about by a sustained step in public capital expenditure."

Nonetheless, the government's tight pursue strings might also hamper the extent to which it can lift growth via enhanced public spending. The fiscal deficit target for 2019-20 has been set at 3.3 per cent of the GDP.

However, persistent spending pressures and slower are likely to widen the deficit.

"With the government (Centre and States) deficit and borrowing itself running at 8-9 per cent, there is limited headroom from the financial savings of the financial sector," Brickwork Ratings' Chief Economic Advisor M.Govinda Rao, told IANS.

"It will become difficult to reduce the interest rates on corporate borrowings even when RBI reduces the policy rate, the transmission may not take place. It would be more appropriate to fast track government spending through disinvestment proceeds than through additional borrowing from the financial sector."

On lending rates, the Reserve Bank of India's MPC is expected to continue with the accommodative stance by reducing key lending rates during the upcoming monetary policy review slated in December.

"Based on our expectation that GDP growth slowed in Q2FY20, we expect the MPC to cut rates next week," ICRA Principal Economist Aditi Nayar said.

In October, the RBI reduced its key lending rate for the fifth consecutive time to 5.15 per cent, the lowest in around a decade, to boost consumption and reverse the slowdown.

The next policy review is slated for the first week of December.

(Rohit Vaid can be contacted at rohit.v@ians.in)

--IANS

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First Published: Thu, November 28 2019. 22:11 IST
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