Most of the comments on Budget 2026 were laudatory, if not euphoric. A collection of some of the summary comments: Businesslike, calm-collected, short, boring and good. Over 95 per cent approval rating — something I have not witnessed in over 36 years of active Budget-watching. I was asked to write this article on Budget day, but politely refused. Reason: Bitter experience that there was always a wicket-taking googly in the budget.
Only after the dust of euphoria had settled did the googly emerge in the form of yet another retrospective tax — starting April 2026, there will be a new tax on capital gains made via the purchase of SGBs or sovereign gold bonds. The SGBs were introduced in 2015-16 when gold prices were low and stable (even declining from their local peak in 2011-12). This scheme of annual issuance of gold bonds was stopped in 2024 — well before the parabolic surge in international gold prices. The terms of the SGB agreement with the citizen and voter was that you buy paper gold, and you are returned paper money when you sell. Capital gains, and losses, with the investor. No tax was to be paid if the price of gold went up, and if the price of gold went down, your loss. Now, retrospectively, because gold prices have shot up, you will pay a long-term capital gains tax of 12.5 per cent. Paraphrasing Khrushchev, the government’s attitude is: What is mine is mine — what is yours is also mine.
Besides being greedy and unfair — retrospective taxes should be illegal — the government is also being petty, and can one dare say it, stupid and counterproductive. Nothing is gained and much is lost in terms of investor confidence via this new tax. It will net about Rs 200 crore a year — about .005 per cent of our tax receipts in 2025-26.
Several benefits have accrued to the government via gold bonds. SGBs lowered imports (less physical gold imports), and via a higher current account balance, helped keep the rupee stable, if not to appreciate. And don’t cry for the government because of the trivial tax loss. My estimate is that the government made upwards of Rs 50,000 crore from borrowing from the investor (at an annual rate of 2.5 per cent) rather than 7 per cent from the market. And it wants to get Rs 200 crore more — I give up. A simple Occam’s razor rule for the Finance Minister: Any retrospective tax is bad policy, by definition, morally, and otherwise.
Retrospective taxes reflect very badly on the process of Budget– and decision-making in India. As I have been shouting to whoever has been within earshot, the secret decision-making of the Budget is a relic of several bygone eras. We did so when we were ruled by a colonial power, and we are doing it today when we are ostensibly on the road to Viksit Bharat.
For the last decade or so, I have advocated an open policy towards Budget presentation. There is no need to follow the 200-year-old legacy of secret preparation (though the halwa should stay). Budget preparation should be an open, collaborative effort, with the final decision resting, obviously, with the policymakers.
Excluding the retrospective tax, Budget 2026 is a very good example of good policymaking. Major policies were announced before the Budget. Income tax reform was announced last year, GST reform in September. The latter is still incomplete, with promises to keep. And for all the bravado (and incorrect and inappropriate) talk of self-reliance, India has acted in a welcome opposite direction. In the short space of a few months, it has become considerably more open — look at the just-announced trade deals! Major trade reforms are now outside the Budget (unlike 1991). And major deregulation, as advocated in a NITI Aayog report (again, outside the Budget), is likely to become policy.
In the run-up to the Budget, most commentators, both within and outside the government, expected the Centre to take significant steps towards addressing the number one ailment of the Indian economy — lack of growth of private investment. The share of private investment in GDP is down about 10 percentage points from its earlier peak of 30 per cent. Indian investment is going abroad and foreign investment is not coming to India. Net FDI is falling, is barely positive, and is at the lowest level (as a percentage of GDP) since our mega-crisis year, 1990. The last three months’ net FDI has been negative. Stated bluntly, the investment climate is bad — and the new retrospective tax makes it worse. Indians want to invest abroad, and foreigners don’t want to invest in India. And don’t blame US President Donald Trump’s tariffs or the unstable global environment for this. Indeed, world growth is higher this year and world inflation is lower. Further, many countries have managed the uncertainty extraordinarily well. So, Indian policymakers do not deserve the extra credit heaped on them by domestic experts for “good” growth.
Private investment is down big-time because of the UPA’s retrospective taxation in 2012 and the BJP’s Model Bilateral Investment Treaty of 2015 (an extraordinarily bad model). The latter stipulated that a divorce agreement between a foreign and a domestic firm could only be achieved if two conditions were met — a five-year cooling and negotiation period, failing which, adjudication by an Indian judge. Seeing these requirements, the foreign investor decided to vote with her feet. (The new, revised BIT recommends a three-year cooling period and maybe an international judge — some improvement). Do we know of any divorce that faces these stringent conditions? No. Then why did two bad laws made by the two leading and contrasting political parties happen? Because the source of these decisions was the same — Indian politicians, advised by our Yes Minister all-powerful bureaucrats, who believe that India will and can do as it pleases because the world cannot do without us. It would be funny if it weren’t so sad.
Bhalla is chairperson of the Technical Expert Group for the first official Household Income Survey for India. Views are personal
