The Reserve Bank of India (RBI) is the ideal person to set the tone for the next Union Budget for 2024–2025. Even though the BJP-led NDA government unveiled an interim budget for 2024–25 in February of this year, the electoral math game has altered the entire picture, giving the government a razor-thin majority in the 18th Lok Sabha. The BJP's own vote count has plummeted below 272, and the budget's goals are about to shift due to the party's reliance on coalition partners.

The RBI's assessment of the economy in the second monetary policy of 2024–25 was presented here today by RBI Governor Shaktikanta Das, whose name is frequently floated for the role of the next Finance Minister. This provides some guidance for the next Finance Minister to take into account.

Argument in favor of increasing nominal GDP

The nominal GDP was set at 10.5 percent in the Interim Budget, which was unveiled in February. Nominal GDP is significant because it aids in establishing goals for tax collections and the fiscal deficit. Given that the RBI has estimated that the actual GDP will be about 7.2 percent, this nominal GDP figure is plausible and may even surpass 10.5 percent. The RBI has actually increased the GDP estimates for 2024–2025 by 20 basis points, to 7.2 percent.

The National Statistical Office (NSO) provisional estimates for the just ended fiscal year 2023–24 put the real GDP at 8.2 percent, which is significantly higher than many had predicted at the beginning of the year. The estimates for the current fiscal year, at 7.2 percent, are reasonable given the greater base from the previous year. For 2024–2025, the CPI inflation estimate is 4.5 percent.

These encouraging economic improvements undoubtedly support a higher nominal GDP in the Union Budget, which will help with the fiscal deficit and the tax collection numbers that are linked to it.

Additional Budgetary actions to combat consistently High Food Inflation

The price of food is continuing to rise. Food inflation has been steady, averaging 7.0 percent in 2023–2024 and 7.9 percent in April 2024. "Although the MPC acknowledged the current level of disinflation without compromising growth, it is still on the lookout for potential inflationary threats, especially those stemming from food inflation, that could potentially impede the progress toward disinflation," the RBI issued a warning. Fiscal measures are required to alleviate supply constraints, even if monetary policy can only partially solve this problem. This is where supply-side problems may be addressed by the budget.

There needs to be a push for private Consumption

The RBI has observed that stable discretionary expenditure in metropolitan areas is indicative of a recovery in private consumption, the backbone of aggregate demand. For instance, between April and May of 2024, retail sales of passenger cars rose by 7.7 percent. Despite capacity restrictions and a high base of 19.0 percent growth a year ago, domestic aviation passenger traffic increased by 4.6 percent during this time. Sales of two-wheelers at retail increased by 16.3% in April and May. On the other hand, the budget should provide greater funding for rural and semi-urban areas, since they require encouragement. The results of the Lok Sabha elections also send a message about unemployment and hardship in rural areas, which the Budget is expected to address.

Continued Government Capital Expenditures

Since the epidemic, growth has been greatly aided by large government capital expenditures because private capital is still subpar in several industries. The government's ongoing focus on capital expenditures, strong capacity utilization, and corporate confidence, according to the RBI, is encouraging for investment activities. "Preliminary findings indicate that manufacturing capacity utilization increased to 76.5 percent in the fourth quarter of 2023–24 from 74.7 percent in the previous quarter, surpassing the long-term average of 73.8 percent," according to the RBI.

The government has to strike a delicate balance in the Budget 2024–2025 between capital expenditures and monies to support rural consumption - cuts to capital spending would have an immediate and long-term negative impact on the growth momentum.