Even though much of the policy focus across most levels of government over the last few months was focused on handling the fallout of demonetisation, Finance Minister Arun Jaitley’s Budget speech on Wednesday surprisingly did not add much new to the conversation. Those hit by the currency exchange move, which delivered a shock to the economy, will find solace in the new income tax slabs that soften the blow. But any question of “windfall gains” to the government, as the Economic Survey suggested, have been put off to next year.

Jaitley brought up demonetisation on 13 occasions in the speech. Here’s a quick summary of what he said:

  • Trusted custodian:
    To begin with, Jaitley listed demonetisation of high-denomination bank notes as one of the two “tectonic policy initiatives”, along with the Goods and Services Tax, that the country witnessed over the past year. He also claimed that they had put in a number of initiatives to attack black money and so people trust the government with their money.

  • Special section:

    The finance minister dedicated two entire paragraphs to demonetisation, reiterating how tax evasion had become “a way of life” for many in India and insisting that this compromised public interest and let tax evaders get rich while the poor were deprived.
  •  “Demonetisation seeks to create a new ‘normal’ wherein the GDP would be bigger, cleaner and real. This exercise is part of our Government’s resolve to eliminate corruption, black money, counterfeit currency and terror funding. Like all reforms, this measure is obviously disruptive, as it seeks to change the retrograde status quo. Drop in economic activity, if any, on account of the currency squeeze during the remonetisation period is expected to have only a transient 6 impact on the economy. I am reminded here of what the Father of the Nation, Mahatma Gandhi, had said: “A right cause never fails”.  

    • Impact (in the long run):

      In terms of the actual achievements of demonetisation, Jaitley mostly spoke of its “potential” to create long-term benefits of “reduced corruption, greater digitisation of the economy, increased flow of financial savings and greater formalisation of the economy, all of which would eventually lead to higher GDP growth and tax revenues.”

      He made one reference to the promised windfall gains, but only in the long run, saying it helps transfer resources from tax evaders to government which can use them for the poor. Jaitley also said there was early evidence of a shift to digitisation and a capacity for banks to lend at reduced interest rates.
    • Impact on GDP:

      The finance minister said that the pace of “remonetisation” meaning the printing and distribution of new notes, has picked up and will soon reach comfortable levels. He claimed that the effects of demonetisation on the economy will not spill over to the next fiscal year, while the excess cash with banks will lower borrowing costs and should boost economic activity.

      “Thanks to the surplus liquidity created by demonetisation,” Jaitley said, “ the Banks have already started reducing their lending rates, including those for housing.”
    • Fiscal deficit and windfall revenues:

      The government hints that it is expecting a higher tax realisation from the “huge cash deposits in banks triggered by demonetisation,” which could help it improve India’s fiscal deficit situation, but not until next year.
    • Data mining

      Listing out the amount of deposits into bank accounts following demonetisation, Jaitley said that this data mining will “help us immensely in expanding the tax net as well as increasing revenues,” which he said was one of the objectives of demonetisation.
    • Tax breaks:

      Jaitley used the Budget to announce a number of breaks for income taxpayers, lowering the rate for those earning between Rs 2.5 lakh to Rs 5 lakh by half, from 10% to 5% and a Rs 12,500 rebate for taxpayers earning more. The finance minister justified these tax breaks saying there is a legitimate expectation from taxpayers after demonetisation that their tax burden will be reduced.