The Unexpected Googly
Following a generally positive reception, with many lauding Budget 2026 as businesslike and calm, a surprising element emerged. After the initial wave
of approval subsided, a less-than-welcome surprise materialized: a new retrospective tax on capital gains derived from Sovereign Gold Bonds (SGBs). Introduced in 2015-16, the SGB scheme was designed when gold prices were comparatively stable, offering investors a way to hold gold digitally with the understanding that profits and losses would be their own. The government had assured citizens that any gains would be tax-exempt, and losses would be borne by the investor. However, with gold prices having surged significantly since the scheme's inception, the government has now decided to impose a long-term capital gains tax of 12.5 per cent on these gains, a move that fundamentally alters the initial agreement and raises questions about the government's stance on property rights.
Economic Ramifications and Fairness
This newly imposed retrospective tax on SGBs is not only perceived as greedy and unfair, but also as a potentially counterproductive measure. The imposition of retrospective taxes is widely considered poor policy and should ideally be outlawed. While the government anticipates collecting approximately Rs 200 crore annually from this tax, a sum that represents a minuscule 0.005 per cent of projected tax receipts for 2025-26, the damage to investor confidence could be far more substantial. The SGB scheme itself had offered several benefits to the government, including a reduction in physical gold imports, which in turn supported a healthier current account balance and contributed to rupee stability. Furthermore, the government potentially benefited significantly from borrowing funds through these bonds at a low annual interest rate of 2.5 per cent, compared to market borrowing rates of around 7 per cent. The author suggests that the government may have already gained upwards of Rs 50,000 crore from this arrangement, making the pursuit of an additional Rs 200 crore seem remarkably petty and short-sighted, contradicting the principle of Occam's razor which favors simpler explanations and policies.
Budgetary Process Reform Needed
The inclusion of a retrospective tax in the budget highlights significant flaws in India's budgeting and decision-making processes. The author argues that the tradition of secret budget preparation, a legacy inherited from colonial times, is outdated and incompatible with the nation's aspirations for self-reliance and progress. For over a decade, there has been advocacy for a more open and collaborative approach to budget formulation. While acknowledging the need for the symbolic 'halwa ceremony,' the core process should involve broader input and transparency, allowing for informed decisions that are ultimately made by policymakers. This contrasts sharply with the current system, where critical decisions are made behind closed doors, leading to policy choices like the retrospective tax that can undermine public trust and economic stability.
Broader Economic Landscape
Beyond the contentious retrospective tax, Budget 2026 otherwise presents a picture of sound policy-making. Key initiatives, such as income tax reforms and the Goods and Services Tax (GST) adjustments, were announced prior to the budget presentation, aligning with a trend towards greater policy transparency. Contrary to narratives of self-reliance, India has, in fact, become more open economically in recent months, evidenced by new trade agreements and the movement of major reforms outside the traditional budget cycle, mirroring the significant economic liberalization of 1991. However, the prevailing issue of sluggish private investment, a persistent ailment of the Indian economy, remains. Private investment's share in GDP has fallen significantly, with Indian capital increasingly flowing abroad and foreign investment struggling to enter the country. Net Foreign Direct Investment (FDI) is at its lowest point relative to GDP since the 1990 crisis, with recent months showing negative net FDI. This downturn is not attributable to global factors like US tariffs or geopolitical instability, as global growth has improved and inflation has decreased. Instead, the author points to past policy decisions, including the UPA's retrospective tax actions in 2012 and the BJP's 2015 Model Bilateral Investment Treaty, as key contributors to the adverse investment climate, deterring both domestic and foreign investors.
