Budget 2025: RBI must carry forward the growth baton now, says Motilal Oswal's Raamdeo Agrawal

The objective of this government is crystal clear—achieve an 8% growth rate to progress towards Viksit Bharat ($30 trillion economy) by 2047. Private capital expenditure fundamentally depends on demand; without it, private investment capacity will not materialise. After a period of inactivity, the Central government has now taken concrete steps.

The Budget maintains the broader vision of achieving the 2047 goals. India’s per capita GDP is just $2,500, and furthermore, the middle class had to bear the burden of an 18% Goods & Services Tax (GST) and inflation, so the propensity to consume was almost a hand-to-mouth existence. If ₹1,500 handouts could win elections, the impact of the tax benefit should not be underestimated.

We used to say that the economy is growing, but there was no tangible feel of it on the consumption side. Now, some money has been put in the hands of the middle class because if you can’t increase income, you must reduce taxes so people can buy more. The savings that small families can now make could be directed towards discretionary spending, whether it be replacing two-wheelers or buying new durable goods. We are underestimating the importance of this move.

While the market movement overall was not significant, there has been a boost in consumption demand, particularly evident in the FMCG sector, while capex-related stocks have declined. Clearly, when your income level is between ₹15-24 lakh and you receive a tax benefit of about ₹70,000-80,000 that money will likely go into consumption, and that is what the market is betting on. I would trust the market’s judgment that consumption will benefit FMCG companies the most.

Although average household debt as a percentage of GDP for the Indian household is rising, it is not very high compared to other countries with much higher levels. I prefer not to dwell on this comparison, though.

The actions taken by the government are sufficient, but not solely adequate. The fiscal engine has started, and now it’s time for the monetary engine to fire up.

In my view, the real trouble in the past six months is that credit flow in the economy was constrained, and it needs to come back. From 15-16% credit growth, we are down to 10%. I am not a monetary expert, so how the Reserve Bank of India (RBI) will increase credit flow is not clear to me, but what I am sure of is that as consumption comes back, it will give a fillip to corporate loan demand.

Variables such as inflation, actions by political figures, including Trump, fluctuations in oil prices, geopolitical issues, and monsoonal patterns are numerous and create a complex environment. There are so many elements impacting businesses that are unpredictable. The market cares about profit growth and the quality of growth. The slowdown in corporate earnings is the biggest damage, and credit flow has impacted top-line growth, which in turn is showing up in earnings growth.

If an 8% growth rate is the goal, then it is necessary to accommodate a certain degree of inflation. Previously, inflation was a priority, leading to a decrease in GDP growth to a seven-quarter low of 5.4%. Hence, to achieve higher growth rates, a trade-off is essential.

Given that food weightage was behind the spike in inflation, the Budget has made an attempt at improving crop yields and ensuring self-sufficiency in the agrarian economy. But if you want a grip on inflation, you need to have a separate Budget focused just on agriculture, as it is one of its biggest opportunities and also the biggest challenge. The other big step that the government needs to supplement the Budget with is divestment and needs to be aggressive about selling shares.

For now, I believe the Budget is a strong fiscal bonanza from the government to boost consumption, and it’s now upon the monetary side to carry the growth baton.

Raamdeo Agrawal is Chairman and Co-Founder of Motilal Oswal Financial Services Ltd. Views are personal.