Higher STT on Derivatives – Will it Curb Speculation

In the Union Budget for FY27, presented on February 1, the finance minister announced a significant hike in Securities Transaction Tax (STT) on futures and options (F&O) trades on recognized stock exchanges. Specifically, the STT on options was increased from 0.10% to 0.15%, and on futures from 0.02% to 0.05%. As per the Minister and senior officials, this move aims to curb excessive speculation in the markets and safeguard retail investors from potential losses.

While the intent appears well-meaning on the surface, a closer examination raises questions about its effectiveness and underlying rationale. In my view, this could be a case where policymakers are either overlooking key dynamics of securities markets or using a public-good narrative to justify a straightforward revenue booster. Below, I critically assess the proposal, drawing on market realities, and offer an enhanced perspective on its implications.

Understanding Derivative Trading Objectives

Derivative trading serves multiple legitimate purposes beyond mere speculation. Broadly, participants engage for one or more of the following reasons:

Hedging: Institutional investors, high-net-worth individuals (HNIs), and family offices often use derivatives to protect their portfolios against adverse price movements. This might involve taking short positions in futures or buying put options as insurance, without needing to liquidate underlying securities due to tax, legal, or regulatory constraints.

Speculation: Traders, including HNIs, brokers with proprietary books, and Alternative Investment Funds (AIFs), act on informed predictions about future events that could impact security prices. These positions—long or short—are typically backed by research, data, or experience, and they contribute to market efficiency by incorporating new information.

Arbitrage: Professional traders exploit temporary price discrepancies between spot and derivative markets through offsetting positions. This activity is crucial, as it enhances liquidity and ensures price alignment across markets.

Gambling: A smaller but vocal segment involves retail traders placing instinctive bets with little analytical basis. SEBI studies indicate that over 90% of such participants incur losses, and the volume of these trades has been rising despite the risks. It's important not to conflate these "gamblers" with genuine investors or traders, as doing so can distort regulatory approaches.

Hedgers, speculators (in the informed sense), and arbitrageurs are vital for providing depth and liquidity to both spot and derivative markets. Imposing higher costs on them to address losses among gamblers seems counterproductive—it's like penalizing all drivers for the recklessness of a few.

Critical Assessment: Accuracy and Effectiveness

The government's framing of the STT hike as a tool to "protect retail investors" assumes that speculation is inherently harmful and that higher transaction costs will deter it without collateral damage. However, this overlooks the nuanced roles outlined above. Empirical data from SEBI underscores the losses in retail F&O trading, but punishing the entire ecosystem may not address the root issue.

On the claim that higher costs won't curb gambling instincts: History shows that in aspirational societies like India's, the desire for quick wealth persists, often manifesting in gambling, smuggling, or other risky pursuits. With most traditional gambling avenues restricted or banned in India, regulated derivatives markets offer a safer, monitored alternative. Elevating STT could indeed push participants toward unregulated, opaque platforms—like illegal betting apps or offshore brokers—increasing risks rather than reducing them.

The STT hike might moderately discourage casual gambling but could disproportionately burden legitimate traders, potentially reducing overall market liquidity.

Grammar and flow in public discourse on this topic often suffer from oversimplification; for example, lumping all "speculation" as negative ignores its role in price discovery. Professionally, the budget's communication could be more transparent about revenue projections from this hike, estimated to add several thousand crores to the exchequer, rather than solely emphasizing investor protection.

We need a balanced approach

While I appreciate the budget's shift toward pragmatism in other areas (see here), this STT measure feels like a blunt instrument. Instead of broad tax increases, the government could, for example:

·         Target education and awareness campaigns for retail investors, perhaps mandating risk disclosures or demo trading before live F&O access .

·         Differentiate taxes based on holding periods or trade volumes to spare hedgers and arbitrageurs.

·         Monitor and regulate unregulated alternatives more aggressively to prevent migration.

Ultimately, markets thrive on balance—curbing excesses without stifling innovation. If the goal is sustainable growth, rewarding long-term investing (as the budget does elsewhere with capital gains tweaks) is positive, but let's ensure short-term tools don't undermine it.

Gold and Silver – Raging rivers, stay safe

Heightened volatility in the prices of gold and silver in recent days has tempered the rampant euphoria to some extent. Silver traders, in particular, have grown more cautious following such extreme volatility, with trillions wiped from market caps in a single session.

The lingering question is whether this represents a brief pause in the ongoing bull market for precious metals, as many optimists claimed until recently, or if the party has ended, and the cows are now ready to return home.

I have long held firm views on investing in precious metals, which I have shared with readers on multiple occasions. I am pleased to reiterate and expand upon them here, incorporating recent market developments for clarity.

In my view:

•      Gold and silver remain deeply embedded in our culture, religion, and traditions. Purchases for social, cultural, religious, or traditional obligations should typically be viewed as consumption rather than investment.

Of course, in times of severe financial hardship, these assets can be liquidated for cash, functioning as a form of insurance or hedge. However, under ordinary circumstances, they fall short of qualifying as true "investments" due to their lack of intrinsic yield or productive capacity, unlike equities or bonds.

•      The latest arguments supporting gold and silver as investments often fail scrutiny. For instance, the case for soaring gold prices hinges largely on expectations of a weakening and diminishing US dollar (USD). The two main drivers cited are (i) erosion of its dominance in global trade and finance, and (ii) the US government's unsustainable debt burden, now exceeding $35 trillion.

If that be true, the USD's hegemony could fracture through de-dollarization efforts, such as those discussed in BRICS forums. Yet, if the USD loses its reserve status, a divided global landscape is unlikely to agree on a single alternative—or even a basket of fiat currencies. The uneven distribution of gold reserves across nations makes a gold-backed system improbable as a universal replacement.

Furthermore, should the USD weaken significantly, commodity pricing (including gold) might shift away from dollars toward stronger currencies like the JPY, EUR, CNY, GBP, or AUD, potentially driving sharply lower nominal prices for these assets.

Second, a depreciated USD could enhance US export competitiveness, incentivizing reshoring of manufacturing and leaving excess capacity in Asia—a scenario that proved massively disinflationary during past trade shifts, as seen in the 2010s.

Third, if the US attempts to inflate its way out of debt by devaluing the USD, funding its escalating fiscal deficits becomes precarious. Investors would shy away from depreciating US Treasuries (USTs), forcing austerity measures. Such fiscal tightening could emerge as the most potent disinflationary force of the 21st century, as evidenced by recent market reactions to hawkish Fed nominations.

In this disinflationary environment holding gold as an inflation or currency hedge loses much of its appeal, as safe-haven flows reverse during deleveraging events.

•      The rationale for silver's upward trajectory is equally unpersuasive. A core economic tenet holds that industrial commodities are predominantly price takers: demand for end products dictates raw material prices, not the reverse.

A 250% surge in silver prices—anticipating future industrial demand years ahead—defies this logic, especially when recent crashes reveal overleveraged speculation rather than fundamentals.

Moreover, economic historians recall that silver once rivaled or surpassed gold as a monetary metal for decades, with demand far exceeding today's levels. If heightened industrial use (e.g., in solar or EVs) does materialize, it wouldn't be unprecedented. Recall the repeatedly hyped "peak oil" narrative, peddled until 2009 but now obsolete due to technological advancements like shale extraction—similar innovations could temper silver's supply constraints.

•      Regarding the recent sharp upmove and subsequent collapses in gold and silver prices, I regard them as raging rivers swollen by speculative floods. Traders can choose to dive in and ride the current or wisely observe from the banks. Attempting to navigate with full control, as if in a sturdy boat, is illusory.

History shows that in nearly every precious metal bull cycle—from the 1980 silver bubble to the 2011 peak—most participants suffer losses, while only a fortunate few emerge profitable. The 2025-2026 euphoria, fueled by geopolitical hype and retail frenzy, followed by trillion-dollar wipeouts, proves this time is no different.

The morning after

The Union Budget for FY27 has been presented, dissected, and digested.

The stock market has apparently not liked the budget, primarily because the finance minister proposed to hike the Securities Transactions tax (STT) on derivative trades.

Bond market also appears unhappy. One, it does not like the proposed high gross borrowing for FY27 (Rs17.1trn). Two, there are several voices raising questioning the credibility of this number also. It is felt that the actual number could be materially higher, if (i) disinvestment target (~RS800bn) is not met, as has been the case in past many years; (ii) 8^th pay commission payout is made within FY27 (no provision made in the budget); (iii) gold prices volatility continues and more tranches of Sovereign Gold Bonds are prematurely redeemed; (iv) revenue falls short even from the modest growth estimates.

Businesses are generally satisfied. They find the continued efforts to promote trust-based taxation; duty concessions for several capital goods, chemicals and medicines; 20 year tax concession for certain data centers; and proposal to initiate several new mega infra projects (East-West freight corridor, 7 high speed rail corridors; waterways) and tax incentives/clarity for data centers, GCC etc. positive for sustained growth.

Economists have given mixed reactions. They have commended the fiscal discipline, lower subsidies, and higher capex; but criticized poor execution by several departments and ministries (FY26RE capex much lower than FY26BE) and poor allocation growth for critical areas like education etc.

Politicians are expectedly divided on political lines. NDA supporters have commended the budget proposal as visionary, progressive, growth oriented and good for all sections of the society. Those in opposition have criticized the budget as a wasted opportunity, uninspiring for investors, unfriendly for middle classes, farmers and poor.

Common people have criticized the budget as harsh, as has been the case always. They are disappointed that their “reasonable” expectations of lower taxes, more subsidies/cash payout, better civic amenities, lower lending rates, higher deposit rates, etc. were not addressed by the finance minister.

Insofar as I am concerned, I liked the budget for its business-like approach, without much political rhetoric. It gives comfort that at least the government is aware of the serious challenges faced by the country (skill shortage, poor employment velocity of growth, changing globalization dynamics, need to attract FDI, low risk appetite of private entrepreneurs, trust deficit, counterproductive populism, etc.); and the areas where the real opportunities lie.

However, it does not take away the concerns arising from persistent and extremely poor execution, obdurate denial to admit mistakes; exponentially rising corruption and inefficiencies, and criminal waste of scarce resources on wasteful expenditure like political promotions.

While the attention of markets was focused on budget presentation, a mini crisis of sorts has developed in the precious metal markets. The prices of gold and silver have turned highly volatile and fallen *% and 30% respectively in the past three trading sessions.

Several readers have asked my views on the recent trends in the precious metal prices, persistent FII selling and the likely impact of STT hike on stock market volumes. I will address these questions tomorrow.

Union Budget FY27 – Business like

 Today, the finance minister presented what, in my view, is one of the most business-like and forward-thinking budgets of the past decade. The focus is not on short-term populism but on the long-term health of the Indian economy. This budget comes at a critical juncture, as India faces both emerging global challenges and the demand for sustainable growth.

A Pragmatic Approach: Focused on the Long-Term

The 2026-2027 budget continues with prudent fiscal policies and sustainable growth. However, unlike previous years, where political considerations often shaped budget proposals, this year’s speech was strikingly business-like and direct. The finance minister effectively communicated that the government recognizes the challenges India faces—from a volatile global economy to infrastructure bottlenecks. Importantly, the proposals focus on addressing these challenges through reforms rather than quick fixes.

The budget makes significant strides in cutting down subsidies, ensuring fiscal discipline, and maintaining a neutral stance on tax buoyancy. It avoids populist rhetoric and lays a clear path for growth, leveraging India’s key strengths, such as labor-intensive legacy manufacturing and the untapped potential of sectors like tourism and electronics manufacturing.

Key Highlights

Fiscal Discipline Meets Growth

The government demonstrates clear awareness of current challenges while charting a path to sustainable growth. By cutting subsidies and maintaining strict fiscal discipline, the budget keeps tax buoyancy neutral - a refreshing change from previous years.

Despite the challenges posed by global uncertainties, the government has maintained the fiscal deficit target at 4.3% of GDP for 2026-27

Playing to India's Strengths

The budget strategically focuses on:

·         Labor-intensive manufacturing - India's traditional strength

·         Tourism potential - an underutilized asset

·         Legacy manufacturing sectors - areas where India has proven capabilities

Addressing Critical Challenges

Strategic allocations for:

·         Rare earth minerals development

·         Data centers and cloud services infrastructure

·         Electronics manufacturing ecosystem

·         Simplified regulatory framework for services sector

Market Reforms, Trust-Based Taxation and Clarity

The budget introduces several progressive measures:

·         Curbing securities market speculation by increasing STT on derivatives (options: 0.10% → 0.15%; futures: 0.02% → 0.05%)

·         Tax Decriminalization: Multiple offenses decriminalized or downgraded from rigorous to simple imprisonment. Monetary thresholds introduced (₹10 lakh, ₹50 lakh) for criminal prosecution. Focus shifts from punishment to compliance.

·         TCS burden eased: TCS provisions rationalized (uniform 2% rate for most categories).

·         Buyback tax relief for minority shareholders: Removed from dividend definition. Minority shareholders to pay LTCG/STCG and Promoters to pay full tax.

·         Dividend harvesting rules tightened: Exemption for interest paid on money borrowed to acquire mutual fund units or earn dividend income removed.

·         IT services classification clarified

Infrastructure & Development Push

Urban Development: Material budget enhancement with municipal bond provisions giving fiscal autonomy to local governments

Logistics Revolution

·         High-speed rail corridors

·         Enhanced inland waterways development

·         Tonnage tax benefits extended to inland vessels

Defense

Significant allocation increase recognizing security imperatives

Financial Sector Reforms

The budget proposes fundamental restructuring:

·         REC and PFC reorganization

·         High-level committee for comprehensive banking reforms

·         Signal for next-generation financial sector architecture

Political Optics: The Gandhi Gambit

Introduction of a Mahatma Gandhi-named scheme demonstrates political acumen - addressing opposition concerns while maintaining fiscal discipline.

Market Reaction & Long-term Implications

Initial Negative Response:

STT hike on derivatives

Dividend harvesting rule changes (Section 93 amendment removing interest deduction)

Short-term trader concerns

Long-term Positives:

·         Encourages genuine long-term investing

·         Addresses FII concerns about policy clarity

·         Improves FDI sentiment through regulatory simplification

·         Strengthens India's investment case

Taxation: The New Regime

Income Tax:

·         No rate changes - stability emphasized

·         Enhanced compliance deadlines (revised returns: 9→12 months)

·         Updated return provisions clarified

·         Fee structure rationalized

International Taxation:

Co-operative society definition expanded

IFSC benefits extended (10→20 years)

Federal co-operative dividend taxation clarified

Sovereign Gold Bond exemption refined (LTCG benefit only on redemption not on market sale)

MAT Overhaul:

Rate reduced: 15% → 14%

MAT becomes final tax in old regime

Credit carry-forward: 15 years, 25% annual limit

Conclusion

This budget represents a paradigm shift from populism to pragmatism. While markets may react negatively to anti-speculation measures in the short term, the long-term foundations are remarkably solid.

For investors: Stay the course. This budget rewards patience and punishes speculation - exactly what India needs for sustainable growth.

Economic Survey 2026 – Global challenges to the fore

Every year, the Economic Survey (ES) sets the background for the Union Budget. While the Budget answers the “what”, the Survey explains the “why”. The Economic Survey 2025–26 has been presented amidst elevated global uncertainty and growth challenges.

2025–26 does not focus on short-term stimulus or big announcements. It draws attention to the measures needed for preparing India for a tougher, less predictable world.

Key message of ES-2026: India’s growth story is strong—but sustaining it in a fragmented, geopolitically tense world requires discipline, competitiveness, and state capacity, not shortcuts.

Summary:

·         Growth is strong, but must be defended

·         Discipline beats populism

·         Competitiveness beats protection

·         Process reforms beat flashy schemes

·         For long-term investors, this Survey reinforces one message:

·         India’s opportunity lies not in quick wins, but in steady, structural progress.

 

Global Context: A World That No Longer Rewards Good Behavior

Global volatility is not cyclical anymore—it is structural. India’s policy response is shifting from optimization to resilience.

The Survey candidly highlights that globally growth exists, but it is fragile, uneven, and increasingly driven by geopolitics rather than economics.

Trade policy is now shaped by national security. Capital flows are volatile. Financial markets are pricing uncertainty, not optimism. Even countries with sound macro fundamentals are no longer guaranteed currency stability or steady capital inflows.

For India, this is an important reality check. Strong growth, low inflation, and healthy banks are necessary but no longer sufficient.

India’s Macro Picture: Strong, Stable, and Improving

India’s potential growth rate is higher than before—but sustaining it needs continuous reform.

Despite global headwinds, India’s domestic fundamentals look solid. Growth has remained strong through 2025. Inflation is largely contained, with food prices being the main source of volatility. Banks are well-capitalised and credit growth is healthy. Corporate balance sheets are strong. Public investment has lifted overall economic capacity.

A key upgrade in this Survey is the revision of India’s potential growth rate to 7%, up from 6.5% earlier. This reflects sustained infrastructure creation, logistics improvements, and gradual productivity gains.

Fiscal Policy: Discipline Is No Longer Optional

Loose fiscal behavior in states can raise borrowing costs for everyone. Expect Budget 2026 to double down on fiscal discipline and subtly discourage populism.

One of the strongest chapters in this Survey is on fiscal developments. The message is firm: fiscal credibility has become a strategic asset.

The Centre has met its consolidation targets, reducing the fiscal deficit sharply from pandemic highs. However, the Survey raises a red flag on state-level fiscal behavior, especially the rise of unconditional cash transfers and revenue deficits.

With Indian government bonds now globally indexed, investors are increasingly looking at general government finances, not just the Union Budget.

Cost of Capital: The Structural Problem Nobody Can Ignore

Lower interest rates alone won’t solve India’s investment challenge. Export competitiveness and productivity matter more.

The Survey makes a crucial point that often gets missed in market commentary:

India’s high cost of capital is not just about interest rates—it is structural.

Countries that run persistent current account deficits must pay a premium for global capital. Until India becomes a stronger exporter of goods (not just services), borrowing costs will remain relatively high.

Energy costs and inverted tariffs further add to the competitiveness challenge.

External Sector: Services Help, Manufacturing Anchors Stability

Manufacturing-led exports are back at the center of India’s long-term strategy.

India’s services exports—especially IT—have done heavy lifting for years. They stabilize the balance of payments and generate foreign exchange.

But services exports cannot substitute for manufacturing exports when it comes to currency strength, employment scale, and institutional upgrading.

A notable positive development is the recently concluded India–EU Free Trade Agreement, which opens doors for labor-intensive manufacturing exports and deeper technology integration.

Industry and Manufacturing: Protection Is Not the Answer

Policy support may favor competitiveness over comfort.

While strategic indigenisation is necessary, excessive protection of upstream industries raises costs for downstream exporters. This weakens competitiveness rather than strengthening it.

The focus going forward should be on (i)Innovation and R&D; (ii) MSME scale-up; (iii) Logistics efficiency; (iv) Integration into global value chains; and (v) Lowering the cost of capital and inputs is seen as more effective than raising tariff walls.

Infrastructure: From Building Assets to Using Them Well

Infrastructure themes remain intact, but returns and efficiency will matter more than headline capex numbers.

Public infrastructure spending has been a major growth driver over the past decade. The Survey acknowledges its success—airports have doubled, freight movement has improved, and logistics bottlenecks are easing.

The next phase, however, is about utilisation, execution quality, and private participation. Simply spending more is no longer enough.

Inflation: Tamed, But Climate-Sensitive

Inflation risks are structural and climate-linked, not demand-driven.

Inflation has moderated globally and domestically. Core inflation is subdued, signalling stronger supply-side conditions.

However, food inflation remains volatile due to climate shocks—heatwaves, uneven rainfall, and crop disruptions.

This links inflation management directly to climate adaptation, logistics, and agricultural productivity.

Agriculture: Productivity Over Price Support

Agri reforms may be gradual, but value addition is the real opportunity.

Agriculture continues to employ a large share of India’s workforce, but income stability depends on productivity, not just support prices.

The Survey stresses on crop diversification; better irrigation and water use; stronger food processing and allied sectors; food management systems and supply chains are critical to both farmer incomes and inflation control.

Climate Policy: Sequencing Over Speed

India’s green transition will be practical, not ideological.

Unlike earlier years, the Survey takes a pragmatic stance on climate action.

It emphasizes, mitigation matters but adaptation, energy security, and affordability matter just as much. A rushed transition that raises costs or increases import dependence can hurt competitiveness.

Public transport, climate-resilient infrastructure, and domestic clean-tech manufacturing get priority.

Employment and Skilling: Getting the Basics Right

Human capital quality, not just job numbers, will shape long-term growth.

Employment indicators have improved, but skill mismatches persist. The Survey is realistic about AI. It sees AI as a productivity enhancer, not an immediate job destroyer—but warns against over-investment driven by hype. Education–industry linkages, apprenticeships, and on-the-job training are highlighted as critical.

Urbanization: The Missing Economic Engine

Urban infrastructure and governance reforms are emerging as a long-term theme.

One of the most striking additions to this Survey is its deep dive into urbanization.

Indian cities lack fiscal autonomy, planning capacity, and economic agency. Housing, transport, sanitation, and land constraints are holding back productivity.

The Survey argues that cities must be treated as engines of growth, not administrative units.

The Bigger Idea: The Entrepreneurial State

Threaded through the Survey is a larger idea—the need for an entrepreneurial state.

This does not mean state control or state capitalism. It means:

·         Faster decision-making

·         Smarter regulation

·         Willingness to experiment and course-correct

·         Trust-based governance

·         Deregulation, process reform, and institutional capability are framed as growth enablers.

A prelude to the Union Budget 2026

Key message: Union Budget 2026 is less about stimulus or concessions and more about managing trade-offs (growth vs fiscal consolidation; economic prudence vs self-reliance; public sector vs private sector, etc.) — a theme investors should factor into portfolio decisions.

Every Union Budget arrives with a familiar mix of hope and anxiety for investors. Will there be a big growth push? Will taxes change? Will markets cheer or sulk?

Going into this Budget, the macro backdrop is more nuanced than the headline numbers suggest. Growth hasn’t collapsed, banks are healthy, and inflation is manageable — but several underlying trends are flashing caution. For investors, this is less about expecting fireworks and more about understanding constraints.

Growth looks fine — until you dig deeper

On paper, FY26 real GDP growth still looks respectable. But dig beneath the headline and the story becomes less comforting. Consumption has slowed, private investment remains cautious, and household savings have steadily declined. Multiple research reports point out that income growth for both households and corporations has weakened over the past year, even as selective tax cuts supported pockets of spending rather than broad-based demand.

For investors, this matters because sustainable corporate earnings are driven by income-led demand, not just government spending or credit-fueled consumption.

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​Government revenues are under pressure

Slower nominal GDP growth is now showing up clearly in government finances. Gross tax revenue growth in FY26 has fallen well short of budget expectations, driven by softer income tax collections, GST rationalization, and weaker corporate profitability

At the same time, the disinvestment program has once again failed to meet targets. To bridge the gap, higher dividends from PSUs and the RBI have helped — but this has come at a cost. PSU capital expenditure as a share of GDP has fallen to nearly half of pre-COVID levels, weakening the medium-term investment pipeline

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Capex cuts are a constraint, not a choice

With revenue falling short and fiscal deficit targets largely non-negotiable, the government’s room to spend has narrowed. As a result, both revenue expenditure and capital expenditure have undershot earlier plans in FY26

Most analysts expect the upcoming Budget to remain fiscally prudent — not because growth doesn’t need support, but because the government is committed to a steady debt-reduction path. Capex is likely to grow in FY27, but at a measured pace rather than as a big stimulus.​

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Household balance sheets are quietly weakening

One of the more underappreciated trends is the deterioration in household finances. Net financial savings have declined even as household debt has risen. Consumption is increasingly being funded by borrowing rather than income growth.

This is problematic from a fiscal standpoint too. Consumption funded through credit generates far less tax revenue than consumption funded through rising wages or profits — making it structurally negative for government finances and aggregate demand over time.

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External risks are rising

India’s external environment has become more challenging. Exports are under pressure from higher US tariffs, global supply-chain disruptions, volatile commodity prices (especially metals), and slowing global growth.

Capital flows haven’t helped either. FDI has moderated, FII outflows have persisted, and the rupee has weakened — all of which increase external vulnerability, even though current account deficits remain manageable for now.

Banking system is strong — with one caveat

On the positive side, India’s banking system is in good shape. Liquidity remains comfortable, capital buffers are strong, and credit growth, while moderating, is still healthy. The credit-to-deposit ratio has stabilised at elevated levels, reflecting improved intermediation efficiency and balance-sheet strength

The caveat? A rising share of consumer credit. While this supports near-term demand, it raises questions about sustainability if income growth doesn’t catch up.

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Taxes: Don’t expect big surprises

A redrafted Income Tax Act has already been implemented, and GST and excise rates have undergone significant changes just a few months back. Given the fiscal constraints, markets are not expecting any major tax giveaways or hikes in this Budget.

That said, selective customs duty tweaks remain possible, especially where global trade commitments or domestic manufacturing priorities require adjustments.

Key overhangs markets want clarity on

Finally, investors will be watching for guidance on two important issues:

·         The 8th Pay Commission, where future payouts could create fiscal pressure, even if implementation is likely later.

·         Sovereign Gold Bond (SGB) redemptions, which have implications for government borrowing and liquidity.

Clear communication on timelines and provisioning could matter more than actual allocations this year.

The bottom line for investors

This Budget is unlikely to be dramatic. Instead, it will probably reflect a careful balancing act — supporting growth where possible, preserving fiscal credibility, and avoiding long-term slippage.

For investors, that means tempering expectations. The focus should be less on Budget-day announcements and more on medium-term themes: quality balance sheets, pricing power, domestic manufacturing, and companies that can grow even in a slower macro environment.

Sometimes, the most important Budget signals are not in what is announced — but in what the government chooses not to promise.

Preparing for the dinner party of generous uncle

One of my distinct childhood memories is of an uncle who used to travel abroad for work almost every year. After every foreign trip, he would invariably host a family dinner. At these gatherings, he would passionately explain the difference between heaven (Europe and the USA) and hell (India). He would make every adult regret being born in India and inspire every child to dream of settling abroad.

My brother and I were least interested in what the uncle had to say. Our attention was firmly fixed on the final act—the opening of the goodies bag after dinner. He would generously distribute “gifts” brought from “foreign.” These invariably included bathroom slippers, shaving and dental kits, cosmetics, and writing instruments picked up from hotel rooms and flights; bottles of perfume; some clothes; small toys; and souvenirs—mostly bought from dollar stores (a fact I discovered only in hindsight after travelling myself).

Three essential items were bottles of liquor from the duty-free shop, a wristwatch, and some electronic gadget (a camera, oven, juicer, or VCR). These, however, were offered for sale. In hindsight, I realize that he probably recovered the cost of his entire trip by selling these items.

The Union Budget feels uncomfortably similar.

Each year brings an elaborate build-up, breathless commentary, and a speech promising balance, growth, and inclusion. By evening, optimism peaks. By the next morning, reality intrudes—through fine print, revised calculations, and newly discovered burdens. The middle class feels poorer, markets recalibrate, and expectations quietly reset.

For nearly 30 years, this cycle has remained remarkably consistent. Budgets do not fail because governments lack intent; they fail because they are asked to be miracles. Growth engine, redistribution tool, political manifesto, and fiscal discipline document—all rolled into one.

The Union Budget 2026 arrives with an especially inconvenient truth: the government has more commitments than cash. Capital expenditure must rise, social obligations cannot shrink, and global conditions are unforgiving. Additional resources must be raised—and no amount of pre-budget consultation can change that arithmetic.

For those expecting the finance minister to pull a bazooka out of her tablet, I have said this before and reiterate it here: the Union Budget in India broadly serves five objectives…

The Union Budget in India usually has five objectives:

(i)    Presenting the annual accounts of the previous year's Union Government for consideration and approval of the Parliament.

(ii)   Presenting the policy roadmap for the future. This usually is a political statement.

(iii)  Presenting the budget of the Union government for the following year. This includes the budget for various revenue and capital expenditure of the union government, allocation of resources to states and union territories, and sources of revenue to meet the budgeted expenditure and allocations.

The key monitorable in this exercise usually is the difference between the revenue and expenditure. The excess of budgeted expenditure over budgeted revenue is termed as fiscal deficit.

This deficit is met by the union government through borrowings from various sources. Changes in provisions of various tax laws are also monitored closely as it impacts the tax liability and compliance requirement for the taxpayers.

(iv)  Presenting an action taken report for the previous budget proposals.

(v)   Presenting a medium-term fiscal road map in terms of the Fiscal Responsibility and Budget Management Act 2003 (FRBM Act).

The interest of most capital market participants is usually limited to the third objective listed above. The rich eagerly wait for the budget to get fiscal incentives to make investments and find loopholes for evading taxes. The middle classes wait for some tax concessions. The poor anticipate more subsidies and welfare schemes.

This year, in particular, the budget anticipations are mostly focused on the following two points:

1)    How the finance minister will manage resources to meet the requirements for higher capital expenditure to stimulate the investment demand and pay commission payout. Raising tax rates or imposing additional levies may not be preferred options. Therefore, abandoning fiscal consolidation by retaining current fiscal deficit (4.4% of GDP) target; raising non tax revenue (aggressive disinvestment); higher tax revenue through stricter compliance; and additional duties on precious metals may be some of the preferred sources of additional revenue.

However, market conditions and higher yields could make disinvestment and aggressive borrowing challenging.

2)    Does the finance minister announce any measures to support the capital markets, especially to stem the incessant outflows of capital that is adversely affecting the INR, Bonds, and the sentiments of domestic investors.

As far as I am concerned, I will listen to the finance minister mainly for objectives (ii) and (iv). More importantly, I would like reassurance that the government is fully conscious of global challenges, has a credible strategy to deal with them, and is firmly in control of the balance of payments situation.

I carry no expectations of tax concessions. I am convinced that my effective tax rate has already bottomed out. Any concession—if granted—would likely be ad hoc and possibly misleading, much like the shiny gifts at my uncle’s dinner: attractive at first glance, but rarely of lasting value.