Cash donations to Indian political parties will be capped at 2,000 rupees (£23.50), with larger donations able to be made by “electoral bonds” under landmark funding reforms announced by the government.

The changes were proposed by the finance minister, Arun Jaitley, while unveiling his first national budget since November’s shock decision to invalidate India’s two highest-value bank notes.

The budget on Wednesday also aimed to cushion the blow of demonetisation on rural Indians and the poor while extending the campaign against untaxed wealth of the prime minister, Narendra Modi, with an announcement that any cash transactions greater than 300,000 rupees would soon be outlawed.

As part of the same effort to coax Indians to declare what they earn – in a country where only 1% are estimated to pay income tax – Jaitley also halved the tax rate for those whose annual earnings fell within the lowest taxable band, 250,000-500,000 rupees a year.

“We are a largely non-tax-compliant society,” Jaitley told the Indian parliament’s lower house. “The predominance of cash in our society makes it possible for people to avoid taxes, and the burden falls on those who are honest and tax-compliant.”

Electoral funding experts and India’s election commission have been urging changes to the country’s highly opaque political funding system, with a study last week finding that nearly 70% of political donations could not be traced to any source.

Currently, donations worth up to 20,000 rupees can be made anonymously, a figure Jaitley proposed on Wednesday to reduce to 2,000 rupees for cash. Digital or cheque payments could be higher, he said, with an option to donate to parties in the form of electoral bonds issued by the Reserve Bank of India.

“It’s a significant step and one in the right direction,” Niranjan Sahoo, an expert in governance and public policy with the Delhi-based Observer Research Foundation, said of the cash limit.

“Most of the problems with political financing in India is that the sources of the funding are anonymous.”

However, Jaitley clarified after the budget speech that the bonds would not bear the name of the donor – indicating that while the funds used to purchase the bonds would be traceable, it could be a new avenue for donors to anonymously give money.

“It leaves a lot unanswered in terms of transparency,” Sahoo said. “Unless you know the people who are buying the bonds, how do you actually know the source – whether it’s individuals, corporates or pressure groups? It creates a loophole for political parties to misuse, and they’re good at it in India.”

Sahoo said he was yet to see the fine print of the scheme, but said it was also likely banks would be able to invest the money from the bonds and parties would also earn the dividends. “It’s a win-win situation for the banks and parties,” he said.



The next step should be forcing the declaration of any cash donations, he added, because parties still had the option of breaking up large cash donations into 2,000-rupee segments to avoid revealing their source. “Parties will park most of their black money under this category,” he said.

“They should have made it mandatory that every paisa has to be accounted for. But, this is something to keep the political parties happy.”

Jaitley on Wednesday hailed India’s fast-growing economy as “a bright spot in [a] world economic landscape” beset by major uncertainty, including rebounding oil prices and the “increasing retreat from globalisation as pressure from protectionism builds up”.

The government’s chief economic adviser admitted on Tuesday that last year’s recall of 1,000- and 500-rupee notes – an estimated 86% of the currency circulating in India – would temporarily slow economic growth. But Jaitley continued to defend the “bold and decisive” move. “The pace of remonetisation has picked up and has reached comfortable levels,” he said.

Rural Indians, who are still heavily reliant on cash and were hit particularly hard by the currency ban, were offered sweeteners in the form of increased credit, crop insurance and a pledge to double farmers’ incomes within five years.

The government also proposed a law to confiscate the assets of Indians who abscond from the country after being accused of financial or other crimes, widely understood to be aimed at the businessman Vijay Millya.

The billionaire liquor baron fled to the UK last year owing hundreds of millions of dollars to creditors and facing charges including money laundering, in connection to the collapse of his business venture Kingfisher Airlines.

Jaitley said that under the new law, the assets of any accused criminals who left the country “would stand confiscated until the person submits himself or herself to the law”.