Ahead of Union Budget, RBI staffers suggest providing consumption boost as a way to revive the animal spirts

Ahead of the upcoming Union Budget for FY26, Reserve Bank of India (RBI) staffers suggested that one of the ways to revive the animal spirts may be to provide a consumption boost even as they cautioned that stickiness in food inflation warrants careful monitoring of second order effects.

The suggestion regarding consumption boost comes in the backdrop of India’s GDP growth slowing to 5.4 per cent in July-September 2024 compared to 8.1 per cent in the year-ago quarter. Union Finance Minister Nirmala Sitharaman will present the Union Budget for FY2026 on February 1st.

“The time is apposite to rekindle the animal spirits, create mass consumer demand and trigger a boom in investment. There is a conducive quickening of high frequency indicators of economic activity in the second half of 2024-25…,” said the staffers, including Deputy Governor MD Patra (who demitted office on January 15^th), in the “State of the Economy” article in RBI’s latest monthly bulletin.

The RBI staffers noted that private final consumption is the brightening spot in the economy, driven by e-commerce and q-commerce among which it is important to foster competition rather than being restrictive.

“One way to revive the animal spirts may be to provide a consumption boost. The demand for household staples has seen a modest rise in the October-December quarter. The middle class is pinning hopes on relief from food inflation and hence higher disposable incomes, especially the urban segment.

“The rural segment is likely to continue to record strong volume growth. In the housing space, the mid-income segment and premiumisation are fuelling demand and leading to overall improvement in market health metrics – another growth gear,” the authors said.

High food inflation

The article noted that headline inflation eased for the second successive month in December (to a four-month low of 5.2 per cent from 5.5 per cent in November 2024).

“Despite the sequential easing, the level of food inflation continues to remain high, with select key products experiencing high double digits inflation (inflation (y-o-y) in vegetables, and edible oils and fats prices was 26.6 per cent and 14.6 per cent, respectively, which together contributed to 61 per cent of the CPI food inflation of 7.7 per cent)

“The stickiness in high food inflation, in an environment of firming rural wages and corporate salary outgoes, warrants careful monitoring of second order effects,” the staffers said.