As India approaches Budget 2026, conversations around growth, investment and competitiveness dominate the economic and policy landscape. Yet beneath these themes lies a deeper and often unexamined issue—what
kind of investor behaviour does India’s financial and tax ecosystem actually reward?
Despite our ambitions around manufacturing, capital formation and supply-chain resilience, the system, often unintentionally, continues to tilt incentives towards short-term decision-making. As India enters a structurally different phase of growth, this misalignment between policy intent and incentive design has become increasingly consequential. Budget 2026 offers a timely opportunity to correct this imbalance.
India’s framework does not explicitly discourage long-term investing. However, through design and execution, it nudges investors towards shorter horizons. Tax design is a major contributor.
Capital gains structures define “long-term” using relatively short holding thresholds by global standards. Frequent changes in tax treatment, surcharges, exemptions and interpretative rules introduce uncertainty into long-term return assumptions. Incentives are often time-bound rather than outcome-bound, rewarding entry within a policy window rather than commitment across a full investment cycle. The behavioural message is clear: enter when incentives exist, exit when optimal, optimise tax later.
Policy volatility reinforces this mindset. Shifts in custom duties and input tariffs alter cost structures mid-cycle, while sector-specific incentives—particularly manufacturing and export-linked schemes—are periodically recalibrated or sunset without multi-year visibility. Even flagship programmes such as the Production Linked Incentive (PLI) scheme reflect this tension. PLI has accelerated capacity creation across electronics, semiconductors and specialty manufacturing, yet remains output- and period-specific rather than explicitly rewarding capital retention, reinvestment or operational continuity beyond the incentive window. Rational investors respond accordingly, prioritising speed of capital recovery over permanence.
The ease of short-term liquidity in India further compounds the tilt toward tactical behaviour. Deep public markets, an active PE/VC ecosystem and vibrant secondary transactions are structural strengths for the economy, but without counter-balancing incentives for duration they naturally encourage faster exits and tactical capital deployment.
This matters because India’s growth model is evolving. The next phase of expansion will depend less on consumption-led momentum, rapid capital recycling and asset-light growth alone, and more on manufacturing scale, supply-chain resilience, domestic value addition and stable long-term capital formation. These outcomes cannot be delivered by transient capital. They require patient capital—capital willing to absorb longer gestation periods, regulatory frictions and early-stage inefficiencies in pursuit of durable outcomes. Yet when signals favour agility over longevity, investors adapt by shortening holding horizons, structuring investments for exit optionality and prioritising flexibility over continuity. Over time, a disconnect emerges: policy seeks long-term outcomes, but incentives reward short-term behaviour.
Budget 2026 arrives at a particularly consequential juncture. India is positioning itself as a global manufacturing and supply-chain hub, and capex-led growth remains a stated priority. Global investors are increasingly evaluating India not merely as a tactical allocation but as a long-term destination. States are actively competing for investment through incentives. Tamil Nadu, Gujarat, Karnataka and Uttar Pradesh, for instance, offer combinations of capital subsidies, interest subvention, land rebates and payroll-linked incentives.
New frameworks for Global Capability Centres (GCCs) and advanced manufacturing hinge on employment thresholds and upfront investment commitments. However, many of these incentives are still front-loaded—rewarding establishment rather than long-term continuity. In this context, policy credibility is no longer just about incentive quantum; it is about predictability over time. The question is no longer, “How do we attract capital?” It is, “Do we meaningfully reward investors who stay the course?”
Budget 2026 presents a clear opportunity to rebalance India’s investment ecosystem—not by discouraging liquidity or exits, but by explicitly recognising and rewarding long-duration commitment. Tax frameworks could reward extended holding periods through progressively lower capital gains for assets held beyond longer thresholds. Stability clauses could ensure that core tax and incentive terms remain unchanged over defined periods.
Greater alignment between central and state incentives could enhance benefits tied to reinvestment, asset longevity, employment continuity or supply-chain deepening. States could shift from purely entry-based subsidies to outcome-linked incentives tied to duration—such as sustained employment or capacity utilisation over time. Such an approach would encourage capital with longer horizons, support manufacturing and supply-chain decisions that require permanence and reinforce India’s positioning as a predictable, long-term investment destination.
Crucially, none of this requires new subsidies. It simply requires better incentive design and policy signals that reward patience, predictability and persistence.
India’s next stage of growth depends not only on how quickly capital arrives, but on how confidently it stays. Budget 2026 has the opportunity to send a clear signal that duration matters. By rewarding investors who stay the course, India can better align investor behaviour with its long-term economic ambitions—unlocking sustainable wealth creation and supporting the country’s next phase of structural growth.
