How deep is India’s slowdown? Just look at the dismal June quarter gross domestic product (GDP) data for the answer. India’s GDP growth slipped to a multi-year low of 5% in the June quarter of FY20, with nominal GDP growth falling to a dismal 8%.

The GDP numbers were way below the already-low expectations. Base effect aside, the culprits largely remain the same. Dismal private final consumption expenditure, lacklustre investment demand and subdued fixed capital formation. No wonder, the slowdown spilled from the manufacturing sector to the services sector.

The good news is that this may be the bottom, but the bad news is that fixing such a slowdown may be easier said than done.

“Unless the US-China trade tensions escalate further, we feel the worst is behind us. From here on, the focus of the government should be on already announced stimulus measures. Since the government has no room for further fiscal stimulus, the onus will be on the central bank to support in the form of rate cuts and ensure faster transmission of rates. We are expecting a 65 basis points (bps) rate cut by FY21, of which 25bps is expected to come through in the October policy meeting," said Anubhuti Sahay, senior economist at Standard Chartered Bank. A basis point is 0.01.

Suvodeep Rakshit, senior economist at Kotak Institutional Equities, concurred, saying expectations of more rate cuts will increase. He expected 25-50bps of interest rate cuts from here on, being as front-loaded as possible. Rakshit also said that the focus should be on pickup in government expenditure, which will feed into the aggregate demand.

As various high-frequency indicators show, this slowdown is part-cyclical and part-structural. Faster transmission may help, but a tight fiscal position makes a quicker turnaround more difficult. So, a fiscal compromise may also be on its way.

“GDP may have seen a floor in Q1, but given the nature of the slowdown, only lower interest rates won’t help. The fall in private final consumption to an 18-quarter low is worrying. Consumers are suffering from negative income and wealth effects —the latter can be attributed to poor performance of equities and mutual funds. There is a double-edged sword hanging on the government’s head in terms of its fiscal position, but unless consumer sentiment and demand improves, GST or direct taxes, won’t improve," said Indranil Pan, chief economist at IDFC First Bank Ltd. GST is goods and services tax.

Likewise, Mark Williams, chief Asia economist of London-based independent research firm Capital Economics Ltd, said there was a good chance that the government’s pledge to lower the fiscal deficit is breached, given how weak the economy appears.

In short, monetary and fiscal policy will need to work in tandem to lift India out of its current distress.

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