India could see a spurt in real economic activity from December this year as the effect of the corporate tax cuts and the policy rate reduction by the Reserve Bank of India (RBI) begin to play out, a report by Edelweiss said on Friday.

During the first quarter of this year, real GDP growth had hit a six-year low of 5 per cent. The brokerage said the high cost of capital and the credit crunch are the key reasons behind this slowdown.

Real rates are high in India by global standards. The measures by the central bank such as the imposition of the Prompt Corrective Action led to a credit crunch, with the crisis in the NBFC sector only aggravating the situation.

However, the fiscal stimulus has finally come into play in the form of corporate tax cuts and the move will kick-start the virtuous cycle of consumption, private investments and boost growth, Edelweiss feels.

“We believe tax cuts could boost GDP growth by 0.4-0.7 percentage points as corporate profitability increases.

“Government spending saw an uptick in July. With the government aiming to pay two installments of PM KISAN by September — releasing Rs 30,000 crore of pending dues and Rs 5,000 crore of pending MSME returns — spending will be significantly higher in the second quarter. We also believe all the small government silos will add up and will contribute to igniting the economy,’’ the report said.

While the RBI has so far brought down the repo rate by 110 basis points, the report pointed out that lending rates have been falling with an additional mandate from the central bank to link retail and MSME loans to an external benchmark, even as inter-bank liquidity has been in surplus.

“Signs of recovery are visible in the expansion in services sector growth. This is likely to thaw and lead to a recovery in the next few months. Co-ordinated monetary and fiscal policy will speed up recovery. We believe that the economy has bottomed out in terms of headline growth number. Real activity will be visible from December 2019,” the report said.