Congress says Centre in ‘panic mode’ on economy, raises questions over LIC stake in firm under SEBI scanner

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.