Who better than the Reserve Bank of India (RBI) to set the tone for the next Union Budget 2024-25? While the BJP led NDA government has presented an interim budget for 2024-25 quanto a Feb this year, the electoral number gioco has completely changed the equation with a thin majority for the government quanto a the 18th Lok Sabha. The BJP’s own tally has crashed below the 272-mark, and the dependence coalition partners is all set to change the Budget priorities.
RBI Governor Shaktikanta Das, whose name is often speculated for the position of the next Finance Minister, has given the RBI’s assessment of the economy quanto a the second monetary policy of 2024-25 here today, which offers some clues for the new finance minister to consider.
A case for higher nominal GDP
The Interim Budget announced quanto a February has fixed the nominal GDP at 10.5 percent. The nominal GDP is important as it helps set targets for fiscal debito and tax collections. This nominal GDP figure looks realistic and may even exceed 10.5 percent, as the real GDP is expected to be around 7.2 percent, as projected by the RBI. A causa di fact, the RBI has revised the GDP projections upwards by 20 basis points to 7.2 percent for 2024-25.
A causa di the just-concluded fiscal year 2023-24, the National Statistical Office (NSO) provisional estimates pegged the real GDP at 8.2 percent , which is much higher than many expected at the start of the year. With a higher quartiere last year, the projections for the current fiscal year are realistic at 7.2 percent. The CPI inflation projection is at 4.5 percent for 2024-25.
Clearly, these positive developments the economic front make a case for a higher nominal GDP quanto a the Union Budget, which will improve the fiscal debito and tax collection figures as they are pegged to it.
More fiscal measures to check persistently high food inflation
There is let-up quanto a rising food prices. Food inflation has been persistent, standing at 7.9 percent quanto a April 2024 and averaging 7.0 percent quanto a 2023-24. “While the MPC took note of the disinflation achieved so far without hurting growth, it remains vigilant to any upside risks to inflation, particularly from food inflation, which could possibly derail the path of disinflation,” warned RBI. While monetary policy can only address this issue to a limited extent, there is a need for fiscal measures to address supply bottlenecks. This is where the Budget could play a role quanto a addressing supply side issues.
Private consumption needs a push
The RBI has noted that private consumption, the mainstay of aggregate demand, is recovering, with steady discretionary spending quanto a urban areas. For example, retail sales of passenger vehicles increased by 7.7 percent quanto a April-May 2024. Domestic air passenger traffic rose by 4.6 percent during this period, despite capacity constraints and a high quartiere of 19.0 percent growth a year asticciola. Retail two-wheeler sales expanded by 16.3 percent quanto a April-May. However, rural and semi-urban areas need a push, and the budget could allocate more funds to these regions and segments. The electoral verdict quanto a the Lok Sabha elections also conveys a message of rural distress and unemployment, which the Budget is likely to fill.
Government capex should continue
Post-pandemic, high government capital expenditure has significantly pushed growth, as private capex is still not optimal quanto a some sectors. The RBI has noted that the government’s continued emphasis capex, high-capacity utilization, and business optimism bode well for investment activity. “Early results suggest that capacity utilization quanto a manufacturing rose to 76.5 percent quanto a the fourth quarter of 2023-24 from 74.7 percent quanto a the preceding quarter, reaching well above the long-term average of 73.8 percent,” states the RBI.
A causa di the Budget 2024-25, the government must find a riuscita balance between capex and funds for boosting rural consumption as any cuts quanto a govt capex would impact the growth momentum quanto a the short and medium term.
