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On June 4, 2026, the Congress party, through its General Secretary (Communications) Jairam Ramesh, alleged that the Narendra Modi-led Union government was in 'panic mode' over the economy. This accusation followed media reports that the Centre was considering an ordinance to amend the Income Tax Act to remove the 12.5% long-term capital gains (LTCG) tax on foreign portfolio investor (FPI) investments in government securities—a tax introduced in the July 2024 Union Budget. Separately, Ramesh questioned the Life Insurance Corporation of India’s (LIC) approximately 10.8% stake in Rajesh Exports, a jewellery and gold refining company facing regulatory action by the Securities and Exchange Board of India (SEBI). SEBI had issued an interim order alleging large-scale misrepresentation of financial statements and diversion of funds over five years, potentially amounting to ₹15 lakh crore, and barred the company’s promoter and CEO, Rajesh Mehta, from dealing in securities. Ramesh argued that the government’s proposed tax tweak was a temporary measure that could not substitute for addressing structural issues such as stagnant real wages, widening inequalities, concentration of economic power, and rising imports from China.
The debate over long-term capital gains tax (LTCG) on foreign portfolio investments has evolved over the past decade. In the 2018 Union Budget, the government reintroduced LTCG tax on equity investments (over ₹1 lakh) after a long gap, aligning with efforts to broaden the tax base. However, for FPIs investing in government securities (G-secs), a concessional tax regime existed to attract foreign capital and deepen the bond market. The July 2024 Union Budget imposed a 12.5% LTCG tax on FPIs in G-secs, reversing earlier exemptions. This move was part of a broader push to rationalise capital gains taxation, but it triggered concerns about capital flight. By June 2026, reports emerged that the government was considering an ordinance to remove this tax, indicating a policy reversal driven by FPI withdrawals.
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30 MayOn the regulatory front, SEBI’s powers to investigate financial misstatements have been strengthened over time, particularly after the Satyam scandal (2009) and the IL&FS crisis (2018). The regulator can issue interim orders under Section 11 and 11B of the SEBI Act, 1992, to bar entities from the securities market pending investigation. LIC, as India’s largest institutional investor, has historically held stakes in many companies, often with government backing. Its investment in Rajesh Exports—a company now under SEBI scanner—raises questions about due diligence and potential political influence. The Congress’s reference to a 'ruling ecosystem' echoes earlier allegations of regulatory capture, such as the Hindenburg-Adani episode (2023), where SEBI’s investigation was questioned for its independence.
Political & Constitutional Dimensions: The Congress’s attack frames the government as reactive and panicked, undermining its narrative of economic competence. The proposed ordinance route to amend the Income Tax Act bypasses parliamentary scrutiny, raising constitutional questions about the use of Article 123 (ordinance-making power) for fiscal policy. The government’s view would likely argue that the ordinance is a necessary temporary measure to stabilise markets and attract FPIs, consistent with its mandate to manage the economy. Critics, including the Congress, contend that such ad hoc policy reversals create uncertainty and reflect a lack of strategic vision. The LIC-Rajesh Exports issue further politicises regulatory oversight, with the Congress alleging a 'ruling ecosystem' that influences institutional investments. This echoes broader concerns about the independence of regulatory bodies like SEBI and the potential for political interference in public sector undertakings.
Economic & Financial Impact: The proposed removal of the 12.5% LTCG tax on FPIs in G-secs aims to arrest capital flight, as foreign portfolio investors have been withdrawing from Indian markets. The tax was expected to generate revenue but may have deterred investment, especially in government securities. If removed, the fiscal impact could be significant, though the government may hope that increased FPI inflows offset the loss. The Congress argues that this is a temporary fix that does not address deeper issues like stagnant private investment. Corporate profits are at record highs, but private investment as a share of GDP has declined, indicating a preference for financial speculation over productive capacity. The LIC investment in Rajesh Exports—potentially involving ₹15 lakh crore in misstatements—raises concerns about the insurer’s risk management and its exposure to fraud, which could affect policyholder returns and public confidence in LIC.
Social Dimensions: The structural issues highlighted by the Congress—stagnant real wages, widening inequalities, and concentration of economic power—have direct social implications. Stagnant wages reduce household consumption, while inequality fuels social unrest. The government’s focus on attracting FPIs may benefit the financial elite but does little for the working class. The LIC fraud case, if proven, could disproportionately affect small policyholders who rely on LIC for savings and insurance. The Congress’s critique of rising imports from China also touches on employment concerns, as domestic manufacturing struggles to compete. The government’s view would emphasise that FPI inflows support the rupee and lower borrowing costs, indirectly benefiting the broader economy through infrastructure spending.
Governance & Administrative Aspects: The proposed ordinance route highlights governance challenges: using executive orders for major tax policy changes undermines legislative deliberation and predictability. Implementation challenges include ensuring that the removal of LTCG tax is effectively communicated to FPIs and that the tax administration adapts quickly. The LIC-SEBI case raises questions about institutional capacity: how did SEBI detect the fraud, and why did LIC’s due diligence fail? The Congress’s suggestion of political influence points to potential conflicts of interest in public sector investments. Federalism implications are limited, as income tax is a Union subject, but the economic fallout affects states through shared tax revenues.
International Perspective: India’s tax treatment of FPIs is compared with other emerging markets. Many countries offer concessional tax rates on G-sec investments to attract foreign capital. For instance, Brazil and Indonesia have lower or zero capital gains taxes on sovereign bonds. The proposed removal aligns India with global best practices but also signals policy instability. The LIC fraud case could damage India’s reputation as a safe investment destination, as foreign investors may question corporate governance standards. The Congress’s reference to rising Chinese imports highlights trade imbalances, with India’s trade deficit with China widening, affecting domestic industry and employment.
Short-term measures: The government should immediately clarify the status of the proposed ordinance to reduce market uncertainty. If the LTCG tax is removed, it should be accompanied by a clear sunset clause or a review mechanism to prevent permanent revenue loss. SEBI should expedite its investigation into Rajesh Exports and publish a detailed report to restore investor confidence. LIC should conduct an internal audit of its investment in the company and strengthen its due diligence processes for all large holdings.
Medium-term reforms: The government should undertake a comprehensive review of capital gains taxation for FPIs, possibly through a standing committee, to ensure stability and predictability. The Income Tax Act should be amended through parliamentary process rather than ordinances to enhance legislative scrutiny. SEBI’s powers to investigate financial misstatements should be further strengthened, including mandatory disclosure of beneficial ownership. LIC should adopt a more independent investment framework, with clear guidelines to avoid political interference, as recommended by the Narasimham Committee on financial sector reforms.
Long-term vision: India needs to address structural issues like stagnant wages and inequality through policies that boost private investment, such as tax incentives for manufacturing and R&D. The government should reduce dependence on FPI flows by deepening domestic capital markets and encouraging retail participation. A national policy on corporate governance, aligned with OECD principles, should be implemented to prevent frauds like the Rajesh Exports case. Finally, trade policy should aim to reduce imports from China by promoting domestic production under the Production Linked Incentive (PLI) scheme, while diversifying import sources.