The central bank could be relieved that the government did not use the record dividend payment to go on a consumption-led spending spree to win back some of the electorates it lost.  

The central bank could treat this as a win, supporting its inflation-fighting mandate. 

In fact, some of the government’s measures lend a helping hand to the RBI, with the biggest one being the higher-than-initially-budgeted cut in the fiscal deficit.

In May, the RBI paid the government a record Rs 2.11 lakh crore rupees as a dividend to be used in this year's budget. 

The government did not look to compensate for the election setback and, as has been after the COVID years, stuck to its fiscal consolidation glide path.

In fact, it improved today on it by using the RBI’s dividend. 

The government is now targeting a fiscal deficit of 4.9 per cent GDP for 2024-25, which is down from the 5.1 per cent projected in the Interim Budget for the year presented in February and the 5.8 per cent revised estimate for 2023-24. 

Even for the last financial year, the fiscal deficit has improved from a revised estimate of 5.8 per cent of GDP to 5.6 per cent, according to new data released today. 

Fiscal Fitness

The government aims to achieve a fiscal deficit of 4.5 per cent in the next financial year and is likely to continue being hard-nosed about achieving this goal. 

The government’s revenue expenditure, which economists feared would surge, rose a modest 1.5 per cent from the Interim Budget to Rs 3,709,401 crore. Total expenditure was only up by 1 per cent from the Interim Budget, at Rs 4,820,512 crore. The capital expenditure projection remained unchanged from the Interim Budget at a record high of Rs 1,111,111 crore. 

Although the capital expenditure number is unchanged, the effective capital expenditure, which includes grants for the creation of capital assets, has risen to Rs 1,501,889 crore another record high. This figure was at Rs 1,252,293 crore in 2023-24.

The government’s income for 2024-25 is estimated at Rs 3,207,200 crore up 4.1 per cent from the Interim Budget. 

As a result, the fiscal deficit has been cut to Rs 1,613,312 crore (4.9 per cent of GDP), or by 4.3 per cent from the Interim Budget.

Fiscal prudence is helping the government cut down its market borrowing. 

The government has assumed lower borrowings from small savings of up to Rs 420,063 crore in 2024-25, as opposed to a borrowing of Rs 471,317 crore in the revised estimate for 2023-24. 

This is probably because it expects competition for small savings collections from bank deposits and stock market investments. If the small savings collections improve, the government will be able to curtail its market borrowing even more to benefit the private sector. 

The government is curbing its T-bill issuance instead of cutting borrowings via dated securities. It has budgeted a net negative issuance of Rs 50,000 crore through T-bills this year. 

This augurs well for the RBI, as the government's absence would ease the pressure on short-term interest rates and boost private-sector capital expenditures. 

The government's emphasis on fiscal prudence and its continued emphasis on capital expenditure suit RBI in its fight against inflation. 

Any big increase in the revenue expenditure would have provided fresh demand side impulses and driven up inflation.  The government could have wanted the government to boost the supply side with its growth-oriented measure, which the budget kept its focus on. 

The government is pursuing fiscal prudence with vigour so that it can impress upon the international rating agencies. 

Like the government, the RBI also believes India is due for a rating upgrade. 

A potential rating upgrade could boost inflows and also cut borrowing costs for Indian companies. This could lend a soft bias to interest rates even before the RBI commences its interest rate reductions.

Tax Help 

The RBI could also take comfort from the government measures to increase the capital gains tax. 

The government raised the short-term capital gains tax to 20 per cent from 15 per cent and has modestly raised the long-term capital gains tax to 12.5 per cent from 10 per cent.

For legacy real-estate deals, the indexation benefit has been removed even as the capital gains tax was lowered to 12.5 per cent.

Regulators have been worried that capital market exuberance and the sudden surge in retail participation in cash and derivative segments of the market pose risks to financial stability. 

The RBI would have had to keep interest rates high to deal with asset price inflation and any financial instability. 

The central bank could feel comforted that the tax changes could bring order to the financial markets and create enabling conditions for interest rate cuts in India. 

Apart from capital gains tax, the cuts in customs duties on a wide range of imports, especially intermediate goods, could also lower the prices of some manufactured goods. 

The duty changes, including for steel, aluminium, copper, farm machinery, and lithium cells, would keep core inflation in check. 

The RBI's current bugbear is food inflation.

Although the budget includes several measures for the farm sector, most of these measures are structural and would not immediately ease the pressure on prices. 

The central bank could continue to hope that an improvement in the monsoon current will bring down food prices and overall inflation. 

The Big Picture

The main takeaways from the 2024-25 Budget are its schemes to boost employment, skilling, and internships for youth and the jobless. 

This was probably done in reaction to the election results. Governments and budgets, too, need continuous learning, and elections offer a reality check. 

It is good that the RBI’s dividend offered room for the government to undertake some revenue expenditure in the form of Direct-Benefit Transfers to first-time employees. This would add to long-term prospects for growth. 

The government’s focus on capital expenditure, particularly the push to industrial corridors, could also boost infrastructure, rural economies, and employment opportunities. 

The budget reinforces a focus on capital expenditure, economic growth, and job creation while avoiding populist measures and maintaining transparency.

With an assumed nominal GDP growth of 10.5 per cent, a revenue increase of 15 per cent, and a capex growth of 17 per cent, alongside a restrained revenue spending increase of 6 per cent year-on-year, it sets the stage for balanced growth and fiscal consolidation.

The RBI will take heart that the government did not do any pump priming, which could have lent to demand-side pressures on inflation. 

The RBI will have its own boxes to tick for lowering interest rates. On its part, the government has ticked all the boxes the RBI had kept for it.

(Kalayan Ram is a Mumbai-based journalist with 30 years of experience in driving coverage of central banking and macroeconomy at various national and international news wire services. Views expressed are personal)