Conciliatory, but Inconclusive

Finance Minister Arun Jaitley’s Budget helps him tide over political and economic issues this year, but he will face a test next year.

- Siddharth Varadharajan

So large does the ghost of the old bank notes loom over the Narendra Modi government even months after their abrupt execution that Finance Minister Arun Jaitley’s latest Budget seems more an exercise in political exorcism than sound economic management.

The fundamental flaw in the Budget — as with the decision to demonetise in the first place — is the assumption that India’s abysmally low tax-to-GDP (gross domestic product) ratio is the product of excessive use of cash in the economy rather than the poor design, implementation, and enforcement of tax policies. Yes, the use of cash helps individuals and companies engage in undocumented and unreported transactions. But neither demonetisation, nor the restrictions on legitimate cash transactions will do anything to reduce either the use of cash or the size of the parallel economy. If anything, the arrival of the Rs 2,000 banknote will make the logistics of unrecorded cash transactions even easier than they were in the past.