The demonetization drive in India has to be one of the biggest management disasters in its history. The International Monetary Fund (IMF) has estimated a 1% reduction in the GDP growth rate as the demonetization effect in India. Advancing the date of the Budget presentation by a month when the government did not have firm estimates of growth rate of the economy or the amount of tax revenues as well as the introduction of the uniform Goods and Services Tax (GST) made the matters worse.
With Assembly elections to be held in several States, the political atmosphere was also not propitious for good Budget-making. The Finance minister has resisted the temptation to introduce populist measures in the budget. One of the small populist act was the reduction of the income tax rate for the first slab from 10% to 5%. This is a bad decision. Not only has it led to a discontinuous rate structure where the marginal tax rate for the next slab jumps to 20%, but the total tax revenue in India is very low at 11% of GDP The government has achieved the fiscal deficit target of 3.5% of GDP. One good move in the right direction was the introduction of electoral bonds for political funding and to propose a ceiling of Rs.2,000 on cash donations to political parties. This was not a big-bang budget. But demonetisation exercise was shocking enough for the health of the economy, budget will help to nurse it back to health.