At the Business Standard BFSI Insight Summit in Mumbai, a high-level panel discussion moderated by Tamal Bandyopadhyay brought to light a deep policy divergence among India’s top economists. The central debate focused on whether India should aggressively incentivize foreign portfolio investment (FPI) and foreign direct investment (FDI) through tax concessions and policy realignments, or pivot toward domestic capital reliance and structural fiscal discipline amid volatile global capital flows.
The Capital Dichotomy: Growth Ambitions vs. External Volatility
India’s ambitious timeline to become a developed economy by 2047—widely termed the Viksit Bharat initiative—requires unprecedented capital accumulation. Aastha Gudwani, India Chief Economist at Barclays, argued that achieving this long-term objective without substantial foreign financial inflows is virtually impossible. According to Gudwani, external capital is essential not only for closing the domestic savings-investment gap but also for stabilizing the Indian Rupee, which provides an overarching anchor for financial stability.
Conversely, Sonal Varma, Managing Director and Chief Economist for India and Asia ex-Japan at Nomura, and Samiran Chakraborty, Managing Director and India Chief Economist at Citibank, cautioned against over-relying on foreign funding. Varma pointed out that global capital is increasingly dictated by geopolitical alignments, high global interest rates, and ongoing supply chain realignments. In an era where developed markets are pulling back capital and FDI decisions prioritize strategic partner alignment over mere manufacturing efficiency, relying heavily on foreign capital exposes domestic growth to external shocks.
FPI Equity Taxation and Capital Allocation Incentives
A central pillar of the discussion centered on tax policy as an active lever for capital attraction. Addressing the current subdued environment for portfolio inflows, Gudwani highlighted that while tax adjustments might not represent broad structural reforms, calibrated tax exemptions for Foreign Portfolio Investors (FPIs) in equity markets could eliminate marginal friction points. With Indian equity valuations relatively elevated, a lack of dominance in the artificial intelligence hardware supply chain, and currency predictability remaining a challenge, reducing the tax drag on foreign funds becomes a strategic imperative.
By reevaluating India’s capital gains tax framework, the government can offset valuation headwinds and make Indian capital markets competitively attractive against emerging market peers. Lowering or simplifying tax surcharges and withholding liabilities on cross-border equity transactions can help alter risk-reward calculations for international asset managers.
Debt Market Tax Reform: The Call for Indexation Restoration
Beyond equity markets, the taxation of debt instruments has emerged as a key focal point ahead of the Union Budget for 2027-28 (FY28). Gudwani explicitly called for the restoration of indexation benefits for fixed-income debt investments. The removal of indexation in debt instruments had previously raised effective tax burdens on investors, dampening participation in long-term debt securities.
Reintroducing indexation would adjust taxable gains for inflation, preserving real capital returns and boosting market depth. Restoring this benefit is vital for expanding liquidity in the corporate bond market, easing access to long-term capital for infrastructure and industrial expansion without exclusively leaning on banking channels.
Fiscal Expenditure Rationalization and Tax Revenue Deployment
Analyzing the macro-fiscal architecture, Aditi Nayar, Chief Economist at ICRA, emphasized that while government capital expenditure (capex) successfully led post-pandemic recovery, broad-based private corporate capex remains restricted to niche sectors like data centers, renewable energy, and electric vehicle (EV) manufacturing. To foster widespread economic momentum, public finance policy must transition from high revenue expenditure toward direct asset creation.
Nayar urged the government to implement rigorous expenditure management. By curbing discretionary revenue spending, fiscal authorities can allocate a larger share of net tax revenues toward high-multiplier capital projects within established borrowing limits. Furthermore, addressing future liabilities—such as the upcoming salary revisions under the Eighth Central Pay Commission—without building up large arrear backlogs will prevent fiscal shocks, ensuring smoother absorption by the treasury while maintaining domestic consumption growth.
“I think one side reform, which is also needed is expenditure management and rationalisation so that within the borrowing that you’re allowed to do, more of it can actually go towards capital spending, and less of it towards revenue expenditure,” noted Aditi Nayar, Chief Economist at ICRA.
Balancing Capital Supply with Demand: Project Bankability and Fiscal Signals
Citibank’s Samiran Chakraborty provided critical numerical context to India’s funding needs. Over the next decade, India’s investment requirements are projected to jump from $1.5 trillion to $3.2 trillion. Of this sum, foreign sources must account for approximately $600 billion, translating to an annual foreign capital requirement of roughly $60 billion over ten years. While this figure falls below the 15-year annual average of $80 billion, Chakraborty emphasized that net capital account surpluses over the past two years have dropped to nearly zero.
To navigate tax distortion dilemmas in capital allocation, Chakraborty stressed that policymakers must focus on project bankability rather than solely tweaking capital supply. He urged the finance minister to use the upcoming Budget to introduce a standardized national framework that enhances project viability, investability, and creditworthiness.
In parallel, Nomura’s Sonal Varma recommended that the government send a decisive fiscal stability signal by curbing public borrowing beyond market expectations. Reducing sovereign debt issuance reassures global rating agencies and institutional investors, mitigating sovereign risk premiums and indirectly lowering borrowing costs across the private sector.
Frequently Asked Questions
Aastha Gudwani of Barclays believes foreign inflows are essential for achieving the Viksit Bharat 2047 goal and maintaining currency stability. Conversely, Sonal Varma of Nomura and Samiran Chakraborty of Citibank argue that heightened global volatility, geopolitical tensions, and changing capital flows make heavy reliance on foreign funds risky.
According to a Citibank study cited by Samiran Chakraborty, India's investment requirement is projected to increase from $1.5 trillion currently to $3.2 trillion over the next decade, with $600 billion needed from foreign sources, or roughly $60 billion annually.
Barclays' Aastha Gudwani recommended tax exemptions for Foreign Portfolio Investors (FPIs) in equity markets to lower investment hurdles and advocated for restoring indexation benefits on debt instruments ahead of the FY28 Union Budget.
As explained by ICRA's Aditi Nayar, expenditure rationalization helps control non-productive revenue expenditure, allowing the government to dedicate a larger portion of its statutory borrowing limits and tax collections directly toward productive capital expenditure.
Chakraborty argued that debates focus excessively on capital supply rather than capital demand. He emphasized that policymakers need to focus on making domestic infrastructure and business projects bankable, investable, and viable for lenders and investors.
ICRA's Aditi Nayar advised that the pay revisions under the Eighth Central Pay Commission should be implemented smoothly without accumulating massive arrear backlogs, enabling the economy to absorb the financial burden predictably while stimulating consumption.
