In a recent announcement, the Reserve Bank of India's Monetary Policy Committee (MPC) has decided to continue the disinflation path, keeping the repo rate unchanged at 6.50%. This move ensures that inflation progressively aligns with the medium-term target of 4 per cent within a band of plus or minus 2 percent. The decision comes amidst efforts to support growth, with the first advance estimates (FAE) released by the National Statistical Office (NSO) projecting a robust 7.3 per cent year-on-year growth in the real gross domestic product (GDP) for 2023-24, driven by robust investment activity.
On the fiscal front, the Interim Budget presented on February 1st underscores the government's commitment to fiscal consolidation, with a focus on maintaining existing tax structures, including direct, indirect, and export-related taxes., The budget notably proposes to withdraw direct tax demands of small amounts that have been pending for decades, aiming to provide relief to taxpayers.
Despite increasing the capital expenditure budget by about 11 percent, the government has opted for fiscal consolidation, reducing the underlying fiscal deficit to 5.1% of GDP, which is below expectations.
Moreover, the Interim Budget has faced criticism for its lack of new tax concessions and its tepid support for rural demand, as real income levels remain stagnant. Outlay for health at 0.28% of the GDP (1.9% of the budget expenditure). While the budget promises various schemes and initiatives, there is concern over the allocation for critical sectors such as health and education, with the outlay for health being smaller than in previous two years.
The budget places an emphasis on the country's youth, with the establishment of a corpus of rupees 1 trillion aimed at providing long-term financing with low or nil interest rates. However, critics argue that the budget falls short of transformative measures and does not adequately address states' needs.
Despite these criticisms, the budget highlights the government's commitment to fiscal consolidation and its belief that its performance over the past decade will establish credibility with voters. However, there is a need for greater focus on key sectors such as health, education, and rural development to ensure inclusive growth and address socio-economic disparities.
Overall, the combination of the RBI's monetary policy stance and the government's fiscal measures reflects a cautious approach aimed at balancing inflation control with support for economic growth and stability. There remains a need for continued efforts to address structural challenges and ensure sustainable and inclusive development.
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