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Govt’s fiscal space to support economic activity limited: Kotak

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Mumbai, Nov 30 (IANS) There may not be much the government can do to fightback the severe slowdown facing the economy because the fiscal space to do so is limited after the corporate tax rate cut and GST shortfall, Kotak said in a report on Saturday.

National Statistical Office (NSO) data showed that India’s GDP growth slipped to a six-year low of 4.5 per cent in Q2 owing to sharp decline in manufacturing activity, which contracted by 1 per cent.

Finance Minister Nirmala Sitharaman tweeted on Saturday that the interventions addressing the needs of the economy will continue.

While favourable base effects, increased pace of government spending, lower short-term rates due to lower policy rates and easier liquidity conditions could provide some support to growth in 2HFY20, we see limited room for a meaningful revival in activity in the months ahead, the report said.

“The government’s fiscal space to support economic activity is limited after the corporate tax rate cuts and GST shortfall,” the report said.

Kotak said that high frequency data for October and November suggested that economic activity weakened further despite festive season demand, revising down its FY2020 GDP estimate by 30 bps to 4.7 per cent.

“On the policy front, we expect the MPC to look through the impact of higher food prices after a dismal 1HFY20 growth and take cues from the moderating core inflation. The MPC will have to revise down the FY2020 GDP estimate from 6.1 per cent while revising higher the near-term CPI inflation trajectory,” Kotak said.

Consistent with the meltdown witnessed in the high frequency indicators, real GDP growth moderated sharply to 4.5 per cent and nominal GDP growth slowed to 6.1 per cent from 8 per cent in Q1FY20, exacerbating the state of the government finances, Kotak said.

Real gross value added (GVA) growth softened to 4.3 per cent in Q2 due to lower industrial growth of 0.5 per cent. Within the industry, manufacturing growth slumped to (-)1 per cent in Q2 from 0.6 per cent in Q1, consistent with the downtrend witnessed in IIP data.

In sync with the distress in real estate, construction growth slowed to 3.3 per cent in Q2 (5.7 per cent in 1QFY20). Electricity and mining segment growth slowed to 3.6 per cent and 0.1 per cent, respectively, in Q2. Services sector growth moderated marginally to 6.8 per cent in Q2.



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