2QFY26 GDP: Strong numbers, soft spots, and a credibility question

India’s growth 2QFY26 surprised positively with 8.2% real GDP growth print, up from 5.6% a year ago. On the face of it, this is an impressive print—broad-based, investment-driven, and supported by a healthy services backbone, and steady private consumption; though, a few familiar questions on data quality, especially after the IMF’s recent downgrade of India’s statistical credibility to Category C, cast some cloud on sustainability.  

A broad-based GDP beat

As per the official release real GDP for Q2FY26 is estimated at ₹48.63 lakh crore, growing 8.2% YoY, while nominal GDP rose 8.7%.

Growth drivers

·         Manufacturing (9.1%) and Construction (7.2%) carried the secondary sector, delivering an aggregate 8.1% GVA growth.

·         Tertiary sector GVA expanded 9.2%, led by:

Financial, real estate & professional services: 10.2%

Public administration & defence: 9.7%

·         Agriculture slowed to 3.5%, consistent with weaker output indicators and a patchy monsoon.

Demand side

·         Private consumption (PFCE) grew 7.9%, reflecting steady urban spending and improving mobility indicators.

·         Gross fixed capital formation (GFCF) grew 7.3%, maintaining investment momentum.

·         Government consumption (GFCE) contracted 2.7%, likely reflecting fiscal consolidation ahead of FY26’s second-half.

H1FY26 perspective

For April–September, GDP rose 8.0% versus 6.1% last year, marking India’s strongest two-quarter stretch in almost three years.

Sector story: Services lead, manufacturing rebounds, agriculture & utilities soft

A deeper look at the GVA table shows a familiar pattern:

·         Services contribute ~60% of nominal GVA, and continue to anchor overall growth.

·         Manufacturing showed genuine buoyancy, supported by strong corporate earnings in Q2 and better IIP manufacturing prints.

·         Construction sustained high growth, mirroring cement and steel consumption trends.

·         Agriculture and utilities remain soft spots, with structural drag from low commodity pricing, erratic weather, and weak rural demand.

Red Flags Worth Noticing

Imports outpace exports

Imports grew 12.8%, much faster than export growth of 5.6%, which typically subtracts from GDP via net exports—even though aggregate GDP still expanded strongly.

Discrepancies surge again

Statistical discrepancies—as shown in the expenditure tables—remain unusually large (₹1.62 lakh crore in Q2), indicating material gaps between the production and expenditure approaches. This has become a recurring feature of quarterly GDP releases.

c) Public Capex vs. Private Capex

While investments remain strong, the composition still leans heavily on the government side. Private capex recovery remains modest outside listed corporates.

Some doubts over sustainability

In parts, the high real growth number may be due to some temporary phenomenon, e.g., benign deflator, GST cuts, lower base, etc. It is, therefore, likely that this high growth rate might not sustain and normalize to a more realistic 6.5-7% range in coming quarters.

The IMF’s "Category C" call: Does it shake the story?

In a recent assessment, the IMF downgraded the quality of India’s national statistics to “Category C”, its second lowest classification. This category signals weak methodological transparency, limited data accessibility, inconsistent revisions, and heavy reliance on indirect indicators rather than direct measurement.

This matters because:

·         India’s GDP is partly extrapolated using proxy indicators (e.g., IIP, credit growth, crop estimates), not actual realised output.

·         As revealed in the NSO’s methodology section, large parts of quarterly GDP are extrapolations from previous-year benchmarks using high-frequency indicators.

·         The persistent “discrepancy” line item—sometimes as high as 3% of GDP—reinforces concerns around measurement error.

·         Frequent, large revisions to past GDP data further complicate trend analysis.

This does not invalidate the strength of 2QFY26 growth, but it does warrant caution in interpreting quarter-to-quarter changes. The IMF’s classification underscores the need to treat India’s quarterly GDP as directionally reliable, but perhaps not precise to the decimal. Hopefully, most of data related concerns will be addressed in the due revision of GDP base year and methodology, that reportedly will be implemented from the February 2026 onward reporting. 

Bottom line: Strong quarter, but keep the salt shaker handy

India’s 2QFY26 GDP print is undeniably strong—broad-based, investment-supportive, and consistent with high-frequency indicators such as credit growth, services PMI, and corporate earnings. Manufacturing’s rebound is a particularly constructive signal.

But the combination of (i) large statistical discrepancies, (ii) significant extrapolation-based estimation, (iii) base effect and benign deflator, and (iii) the IMF’s downgrade of data quality, means markets and analysts must evaluate the numbers with healthy skepticism. India’s growth impulse is real, but the exact magnitude may only settle after future revisions—especially with a base-year change due in early 2026.

For now, the message is clear: the economy is in an upswing.

Indian Equities: The Market Has Grown Up—It’s Time We Do Too

Indian equities have had a quiet year by headline numbers. The Nifty50 is up ~8% over the past twelve months—modest when compared with the sharp rallies in South Korea (KOSPI +71%), Japan (+30%), Brazil (+21%), China (+17%), the United States (+13%) and Europe (+12%).

But short-term snapshots often hide more than they reveal.

Shift the lens to the past three years, and the picture changes meaningfully. Despite geopolitical shocks, supply-chain disruptions, rate volatility and tariff actions, the Nifty50 has delivered +41%, materially outperforming Europe and China, and broadly matching Brazil. Korea (+82%), Japan (+76%) and the US (+68%) remain the standout performers.

Bottom line: 2025 has been a year of consolidation for India—less about chasing returns, more about normalising valuations and aligning equity performance with earnings and nominal growth.

And that’s not a bad thing. It’s what mature markets do.

A Decade of Maturity: Indian Equities Have Entered a New Regime

Over the past ten years, the Indian market has undergone a structural transformation. Three trends stand out:

1. Volatility has declined meaningfully

The wild swings of the 1995–2015 era—multi-year bull and bear cycles, violent drawdowns and dramatic rebounds—have moderated. Price corrections still happen, but the amplitude and duration have compressed.

2. Domestic participation has surged

Rising household savings, the dominance of mutual fund SIPs, and a more informed investor base have reduced dependence on foreign flows. DII inflows now act as a strong counterweight during periods of FPI selling.

3. Long-term Nifty returns have stabilized

The Nifty’s 5-year rolling CAGR, which used to oscillate between -1% (2012) and +41% (2007), now hovers in a steady 12–15% band—broadly aligned with nominal GDP and earnings growth.

These shifts point to a market that has grown broader, deeper and more resilient, driven by local capital rather than hot flows.

Long-Term Returns: Normalization Is a Feature, Not a Bug

Between 1995 and 2015, long-term returns were lumpy. Market timing mattered enormously. Only investors with surplus capital and high risk-tolerance could endure 25–50% drawdowns and still stay invested.

The past decade (2016–2025) tells a different story:

5-year rolling CAGR has averaged ~13%, staying in a tight 12–15% band.

2019 marked the low (~8%) and 2021 the high (~16%)—both still far more contained than earlier decades.

The Nifty has not delivered negative calendar-year returns in any year since 2016—a sharp contrast to its earlier behaviour.

This stability has democratized equity investing.

Millions of middle-class savers now invest through mutual funds and SIPs because the market no longer resembles a casino. It behaves more like a mainstream asset class.

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Why Returns May Moderate Further

Looking ahead, long-term equity returns are likely to settle into a 9–12% range.

Not because the market is weak—but because the economy is maturing.

Three structural forces explain this:

1. A lower inflation–lower rates equilibrium

As India sustains a more stable inflation regime, the nominal GDP growth corridor naturally compresses.

2. Earnings growth tracks nominal growth more closely

The earlier periods of outsized earnings acceleration were driven by leverage cycles and low base effects. Today, corporate balance sheets are healthier, but growth is more linear.

3. Premium valuations are harder to expand from here

With the Nifty already trading at elevated multiples relative to long-term averages, re-rating becomes a limited source of returns. Fundamentals—not multiple expansion—will do the heavy lifting.

Implication:

Investors should keep return expectations moderate, ignore short-term volatility, and avoid the temptation to time markets in a regime where long-term ranges are becoming more predictable.

Foreign Flows: The Tail No Longer Wags the Dog

FPIs have been net sellers in Indian equities in three of the past four years:

2024: Net equity outflow ~₹70bn; debt inflow kept total flows positive.

YTD 2025: Net equity outflow ~₹1.44trn; nominal debt inflow.

Yet despite persistent outflows, the Nifty is +8.8% in 2024 and +10.5% in YTD 2025. This resilience underscores two points:

1. Domestic inflows are now the primary stabiliser

SIPs, EPFO allocations and DII flows have absorbed foreign selling without destabilising the index.

2. FPI selling has historically coincided with global—not domestic—shocks

The only three negative years for the Nifty in the past 25 years—2001, 2008 and 2015—were all linked to global events (dot-com crash, GFC and the China/Greece scares).

Today, India’s domestic liquidity ecosystem is far thicker than it was during those periods.

Conclusion:

While FPI flows matter for sentiment, they no longer dictate market direction the way they once did.

The Adult Market: What Investors Should Do

As Indian equities transition into a more stable, predictable regime, investor behaviour must evolve too:

·         Moderate expectations — long-term returns are likely to settle in a 9–12% band.

·         Stay the course — short-term volatility is normal and less threatening than before.

·         Avoid timing the market — structure now matters more than cycles.

·         Stay disciplined with SIPs — they remain the most effective way to participate in a maturing market.

Indian equities are no longer the wild child of emerging markets.

The market has grown up—steady, broader, more domestically anchored.

It’s time investors adjust their mindset accordingly.

Rupee Depreciation: Demand, Supply, and Simple Economics

The INR has been under steady depreciation pressure for the past few months. USDINR is down about 4.4% year-to-date, raising familiar concerns about stability and comparisons to the 2013 balance-of-payments scare.

It’s worth noting that the recent 50% US tariffs—which grabbed headlines—are not the main reason behind the rupee’s weakness. India’s exports have broadly held up in the first ten months of the financial year. The pressure has come instead from three other factors:

·         Higher imports, largely driven by a jump in gold imports

·         Weak FDI inflows

·         Persistent FPI outflows

Together, these have widened the current account deficit and strained the balance of payments, naturally weighing on the currency.

Where sentiment meets misunderstanding

In the public narrative, the exchange rate of the INR often gets linked—incorrectly—to national pride. Politicians, spiritual leaders, activists and commentators have repeatedly projected a weaker rupee as a national humiliation. Much of this is rhetoric; some of it stems from a basic misunderstanding of economics. At its core, a currency’s exchange rate is simply a function of demand and supply. Nothing more. Nothing personal.

How demand and supply actually work

In today’s world of fiat money, demand for a currency mainly depends on:

·         Its international acceptance as a store of value or medium of exchange

·         The country’s trade balance

Supply, on the other hand, is shaped by domestic conditions:

·         Fiscal deficit

·         Monetary policy and money supply

·         Growth trajectory

This is why closed economies—North Korea, Afghanistan, Tajikistan—can theoretically have “stronger” currencies. With very limited external trade, demand for foreign currency is low. But this strength is optical and meaningless in real economic terms.

India, in contrast, is a large, open, fast-growing economy that:

·         Runs a significant trade deficit

·         Expands domestic liquidity to fund fiscal needs

·         Maintains a higher inflation trajectory to support growth

·         Offers higher interest rates than developed markets

·         Actively integrates with the global economy

Besides, India’s inflation has been structurally 3–4 percentage points higher than the US. Under Purchasing Power Parity (PPP), this guarantees long-term USDINR depreciation.

All of this naturally creates higher demand for foreign currencies, especially the USD and EUR. A gradual INR depreciation in this context is normal and predictable.

What can strengthen the rupee?

There are only two durable ways to improve the demand–supply balance in India’s favor:

·         Raise domestic rates meaningfully to attract global capital into INR debt despite the risks; or

·         Make Indian assets irresistibly attractive—equity, real estate, infrastructure assets—so that global investors bring in long-term capital. To do this, the following would be needed:

·         Productivity gains (higher real growth without higher inflation)

·         Export competitiveness (moving up the value chain)

·         Lower fiscal deficit (reduces money supply expansion)

·         Deep, credible financial markets (especially long-tenor debt)

·         Institutional credibility (policy stability, governance)

Unless one of these plays out at scale, the rupee will continue its gradual depreciation trend. That’s not a sign of national weakness; it’s textbook economics.

A quick reality check

The Bhutanese Ngultrum is pegged to the INR (1 BTN = 1 INR). So USDBTN depreciates in sync with USDINR. Bhutan’s national pride remains intact.

The Afghan Afghani trades “stronger” than the rupee (1 AFN ≈ 1.34 INR). This obviously does not make Afghanistan economically more prestigious than India.

Currencies reflect macro conditions—not national greatness.

Pendulum in balance - for now

Over the weekend, I met a cross-section of market participants at a social gathering—veteran investors, traders, money managers, and brokers. If I had to summarise the overall mood in one word, it would be “befuddled.”

There was a clear sense of cognitive dissonance in the room. People were wrestling with conflicting signals and contradictory beliefs. The discussions felt like watching multiple emotional currents collide beneath a calm surface.

On one hand, there was frustration about personal portfolios lagging. On the other, there was comfort in seeing the benchmarks hold up well. Add to this the fear triggered by headlines predicting an imminent burst in the AI bubble; anxiety over rising Japanese bond yields and a weakening INR; excitement around a potential Indo-US trade deal; and hope that Indian equities may outperform if global markets slip into turmoil.

Amid this emotional tug-of-war, a few broad positioning trends stood out:

Active participants remain overweight in narrative-driven themes — defense, infrastructure, railways, specialty chemicals, semiconductors, data centers, EVs, renewables, and so on.

Many traders have taken FOMO-fueled leveraged bets in precious metals, despite elevated prices. Interestingly, no one mentioned any meaningful crypto exposure.

Despite broad bullishness, there hasn’t been major reshuffling within banking, though money clearly continues to drift from private banks to PSU banks.

Exposure to unlisted names, small caps, and microcaps remains significant.

Sentiment on capital-market-linked stocks has cooled from “exciting” to “neutral,” even though actual positioning hasn’t caught up with this shift.

The mindset seems to be slowly moving from “buy the dips” to “sell the rise.”

Notably, nobody brought up terms like economic reforms, the Budget, macro fundamentals, geopolitics, or economic growth. Bihar’s election outcome came up only as a surprise, not a market factor.

The idea of a December rate cut was casually floated as a reason for a year-end, consumption-led rally—but only a couple of participants seemed genuinely enthused by it.

If I step back and look at the mood, the sentiment pendulum feels balanced—caught somewhere between Greed and Fear. This is despite the negative market breadth, persistent FII outflows, and the relentless drumbeat of bearishness on social media.

A major global shock—something like a Lehman-style event—could easily push that pendulum towards Fear. A successful Indo-US trade deal could just as quickly swing it towards Greed.

For now, though, it sits quietly at the center.

SIP vs Lump sum investment

The empirical evidence in India suggests that the returns from a SIP stabilize around the underlying asset's long term average return.

I analyzed the Nifty50 data from 01 January 2001 to 01 November 2025. I assumed various investors invested a fixed amount at beginning of each month for a tenure of 299 months (25yrs), 240 months (20yrs), 180months (15yrs), 120 months (10yrs), 60 months (5yrs) and 36 months (3yrs). Actual Nifty50 data (closing price on first day of each month) was taken for the sake of convenience, assuming dividend yield cancelled the fund management charges and tracking error (for ETF investors) and brokerages and impact cost for direct equity investors.

The analysis indicates that an SIP in Nifty50 started to outperform the Nifty50 index return only after 7 yrs. The outperformance peaked around 180 months (15yrs) and started to decline. For 20 yrs tenure, Nifty50 monthly SIP returns (CAGR) is almost same as the change in Nifty50. For 25 yrs tenure, SIP returns outperformed marginally.

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We can look at this picture from various angles. For example—

·         In case of passive funds or benchmark investing, investors who have funds readily available, and want to assess whether to invest lump sum or take an SIP route, investing lump sum might be a better idea. However, for investors who do not have funds readily available but have regular cash inflows, SIP is a good option, instead of accumulating funds and trying to time the market.

·         In case of active funds, performance of SIP would largely depend on the quality of the fund management team. A good team which is able to assess the macro and market trends well in advance and position the fund accordingly, is more likely to outperform the peers. However, over a longer period, the answer to ‘SIP vs Lump Sum’ question would remain the same as in the case of passive funds

·         Passive funds may be a better option for a Goal based investment (education, asset purchase, marriage, travel, retirement planning, etc.), as the performance of these funds is less volatile. For wealth creation, investment in active funds may be more rewarding.

Conclusion

Timing the market may not yield any significant outperformance. If you have funds, invest today, if you have flows, do an SIP.

Benchmarks (e.g., Nifty50) yield normal returns (usually a small premium to the nominal GDP growth of the country) over a longer period. For the past 25 years, Nifty50 CAGR has been in the range of 12-14%. Investors should accordingly adjust their expectations. The SIP returns in passive funds (portfolios) mirroring the benchmark are marginally higher only if the investment is continued for a long period (7 yrs or more).

Diversified funds (and portfolios) have historically outperformed the benchmark indices. However, the outperformance depends on the quality of the fund management team. It is therefore important to select the funds prudently, and not just based on their recent performance. IN this the role of investment advisor is critical.

SIP lessons from traditional wisdom

India is entering the final stretch of the festive season. The symbolic victory of light over darkness is behind us; the wedding calendar is in full flow; preparations for Christmas and the New Year have begun. Financial markets, too, seem to have moved past a despondent summer, supported by improving global liquidity, softer inflation prints, and resilient domestic earnings.

This period also offers a moment for reflection. Every year, I revisit the legend of Rāma as narrated by Goswami Tulsidas in the Ramcharit Manas—not as mythology, but as behavioural wisdom. Hidden in its verses are principles that map surprisingly well to the discipline of Systematic Investment Plans (SIPs), especially for household investors.

The two lessons below may be familiar to regular readers, but they remain worth revisiting.

When to start SIP and how long to continue it

सम प्रकास तम पाख दुहुँ नाम भेद बिधि कीन्ह।
ससि सोषक पोषक समुझि जग जस अपजस दीन्ह।।

Tulsidas reminds us that light and darkness are equal in the waxing (Shukla Paksha) and waning (Krishna Paksha) phases of the moon. Yet society attaches meaning to these phases—one perceived as auspicious, the other as inauspicious.

Market cycles follow a similar rhythm. Prices rise, correct, consolidate and rise again—rarely in a straight line. Over long enough horizons, cycles compress into a trend; but in the short term, their emotional impact can be disproportionate.

For SIP investors, these oscillations are not an obstacle; they are the mechanism through which rupee-cost averaging works.

Your average purchase price eventually reflects both rising and falling markets, much like the moonlight that appears different despite being inherently balanced.

The key is simple:

·         Start early, because more cycles mean more averaging.

·         Continue consistently, because interruptions dilute the benefit.

·         Welcome temporary declines, as they lower long-term acquisition cost.

Where to do SIP

Investors often ask which asset is best suited for SIPs: an index fund, an ETF, or a diversified combination of large-cap, flexicap, midcap and small-cap strategies.

Tulsidas offers two metaphors that shed light on this question.

गगन चढ़इ रज पवन प्रसंगा।
कीचहिं मिलइ नीच जल संगा।।

A dust particle, when lifted by gentle winds, rises to the sky. The same particle, when carried by dirty, downward-flowing water, turns into filth.

सुरसरि जल कृत बारुनि जाना।
कबहुँ न संत करहिं तेहि पाना।।

Even when sacred water (Ganga Jal) is mixed with intoxicants, the wise refrain from consuming it.

These verses translate into two practical investment rules:

(a)   Choose Progressive Assets, Not Downward Currents

SIP behaviour works best with assets that possess:

·         sustainable cash flows,

·         sensible valuations,

·         healthy balance sheets, and

·         a structural growth runway.

Think of these as gentle winds. They may not deliver bursts of abnormal returns, but they compound steadily.

Low-quality, high-volatility assets—narratives without fundamentals, over-leveraged businesses, momentum-driven pockets—are the downward currents. They may rise briefly but rarely sustain wealth creation across cycles.

(b)   The Asset Manager Matters as Much as the Asset

A fundamentally sound asset in the hands of an undisciplined or style-drifting fund manager can become a source of needless volatility.

SIP investors should look for:

·         consistency of process,

·         risk discipline,

·         reasonable portfolio turnover, and

·         alignment with mandate.

The Ramayana conveys in metaphor what markets teach through experience:

The discipline to continue and the discernment to choose the right companions.

For SIP investors, these are the two non-negotiable pillars.

Start early. Continue through cycles. Choose assets that behave like gentle winds and managers who keep them that way.

Everything else is noise.

 

Tomorrow, I shall share my views on how long a SIP should be planned and continued.

M7 + M2 that crushed Bihar’s opposition

Bihar assembly elections concluded last week with the incumbent NDA government registering an astounding victory, belying all expectations of anti-incumbency; a strong show by the opposition alliance (MGB); and a surprise by JSP (Jan Suraaj Party), floated by election strategist-turned-politician Prashant Kishor. Almost every exit poll and ground report got Bihar 2025 spectacularly wrong. The NDA’s landslide was not a wave — it was an annihilation.

In my view, the result was a foregone conclusion for anyone who looked beyond Twitter trends and Tejashwi’s viral reels. Numerous independent forecasters, reporters and experts, who claimed to have spent weeks “on the ground”, completely failed to assess the likely outcome of the elections.

The opposition alliance completely lacked seriousness, strategy and resources; notwithstanding the social media noise. The new challenger JSP lacked resources and credibility (was mostly seen as a BJP agent put up to cut into opposition votes). They were no match for the massive deployment of M7 (Meticulous planning, Men, Machine, Media, Money, Mandir and Modi) Force by the incumbent NDA. Besides, they managed the most relevant M2 (Muslim and Mahila) extremely well through tactically supporting AIMIM and offering cash to women, just ahead of elections. More than 100 MPs of BJP spent weeks campaigning in the hinterland. Several of the Chief Ministers of BJP ruled states held dozens of rallies across the state. NDA had appointed multiple booth agents several weeks in advance.

The opposition leaders, Rahul Gandhi and Tejashwi Yadav mostly resorted to gimmicks; and “hoped” for anti-incumbency to work in their favor. They could neither adequately highlight the failures of the incumbent Chief Minister (almost 20 years), nor present a coherent and credible agenda for development.

After this headline comment, I would like to share some of my impressions about Bihar, made during a short visit to the state.

·         The socio-economic milieu of Bihar is uncannily similar to the broader picture of India. For example, most educated youth are eager to migrate out of the state - NCR, Bengaluru and Mumbai being the most coveted destinations, just like the educated youth from “developed” states look to immigrate overseas. Most rich people have invested in real estate and businesses outside the state, just like rich people from Delhi and Mumbai buying real estate in UAE, Portugal, and UK etc. Most aspire to send their children to study in schools and colleges outside the state, just like people in other states aspire a “foreign degree” for their wards.

·         Migrated Biharis, who are well settled in other states make references to the rich culture, heritage and resource pool of Bihar, in the same manner as NRIs settled overseas, with no intent to return, invest or otherwise contribute to their cherished homeland.

·         Election in Bihar is a distinct, stand-alone spectacle event, totally disconnected from the regular life of the local populace. Most treat it like a once in five-year village fair, where artists from outside come and perform. They get a chance to feast and enjoy dance performances. In the end they vote for the best orchestra performance, and return to their routine life.

·         A disturbing chunk of Bihar’s wildly popular Bhojpuri music, cinema and ‘orchestra’ programmes revolves around double-meaning lyrics, voyeuristic camera angles and incest-themed humor that would be cancelled in many other states. A noticeable section of Bihar’s youth—especially in semi-urban and rural pockets—consume a worrying volume of low-quality, hyper-sexualized Bhojpuri content, which shapes attitudes and aspirations in ways that deserve deeper study. In most village orchestra performances (election rallies, puja pandals, marriages etc.) that I witnessed, and in several popular Bhojpuri music videos I watched, this was a common theme. This section of youth may be susceptible to get trapped in a PIT (addiction to Porn, Incest and Tobacco).

·         Liquor ban has helped several households. Particularly, women in these households are grateful to the administration for saving their families. However, implementation of the prohibition policy is definitely not commendable. The cases of spurious liquor, smuggling from neighboring states, and corruption in enforcement are not uncommon.

·         The biggest paradox of Bihar is that it has one of the most aware populations (socially, culturally, politically, and economically); but only a few seem to be exercising their rights. You may find farmers who can quote Amartya Sen on entitlement failure but will not protest when their PMAY house is delayed by five years and a ₹50,000 bribe is demanded. They have accepted corruption, non-performance, apathy, and indifference of administration as a fait accompli. Rhetoric during the festival of elections apart, it is hard to find people raising voice for their rights.

·         Rural housing and rural roads have been the best performing government schemes in Bihar, though it is not uncommon to hear complaints of corruption in these two programs also. Collapsing bridges, stolen roads, schools, primary health centers, etc. in Bihar are all part of the social media folklore.

Overall, my impression is that Bihar today is India’s most politically sophisticated state trapped in an economically prehistoric age. Until private capital sees profit, until a real entrepreneurial class emerges from within (not just Delhi-returned IAS officers’ sons), and until Biharis start punishing non-performance instead of rewarding freebies and identity, progress might remain incremental, corrupt, and cruelly slow.

 

Towards a trust-based tax governance structure

Recently, NITI Aayog published a working paper titled “Towards India’s Tax Transformation: Decriminalization and Trust-Based Governance”. The paper is a follow up to the recent enactment of the Income Tax At 2025. It is an extremely important step for making the tax governance structure trust based.

The paper seeks to provide a comprehensive and critical analysis of the criminal provisions within the Income-tax Act, 2025, mapping the present extent of criminalization, documenting omissions and modifications, and recommending a trust-based regulatory transition for India’s direct tax regime.

Recognizing the evolving policy landscape which stresses ease of business, citizen-centricity, and the need to move away from “fear-based” enforcement, the paper evaluates each criminal provision through a principled criminal law-making framework rooted in jurisprudence, comparative regulatory best practices, and provides recommendations. Its central premise is that decriminalization, rationalization of punishments, and emphasis on proportionate sanctions will collectively align India’s income-tax law with the vision of a fair, accessible, and modern compliance regime.

Summary of the working paper

·         The paper argues that India’s direct tax regime historically over-criminalized even minor procedural defaults. The Income Tax Act 2025 reduces criminalization but still criminalizes 35 acts across 13 provisions.

·         Applying a principle based criminal law creation framework (harm, necessity, proportionality, intent, clarity), it proposes further decriminalization, removal of mandatory jail terms, restoring burden of proof to prosecution, clearer drafting, and periodic review.

·         It recommends prosecution should be reserved only for willful / fraudulent / significant harm behaviors. All else must be a civil penalty domain.

Strong points

The paper correctly identifies the problem of reverse burden of proof in ITA 2025.

Appropriately flags the disproportionate penalty design relative to the BNS

Correct categorization: obstruction / evasion / payment failure / public servant breach

For the first time a government working paper explicitly shifts “normative anchor” from “enforcement” to “trust”. To this extent there is a paradigm shift.

Gaps

Economic modelling absent: The paper doesn’t quantify fiscal impact of decriminalization vs retaining criminal penalty for 6 core offences. This would be a critical input for developing a policy consensus amongst various organs of the policy ecosystem.

Operational tradeoffs not analyzed: CBDT has historically used criminal threat to solve compliance capacity problem — paper assumes that trust-based regime reduces admin cost but does not model enforcement substitution cost.

Digital rights section inadequate: The section on access to passwords / virtual digital space rightly flags constitutional risk, but it does not propose a constitutional safe harbour architecture. Merely stating risk is not sufficient policy, in my view.

No sunset architecture: The Paper proposes periodic legislative review but does not create an actually enforceable review mechanism (eg automatic expiry unless reviewed).

No tiering by taxpayer class: The compliance behavior of various entities - MSME, gig, self-employed, salaried - is structurally different. A single criminalization framework may not be optimal.

No distinction between pre-assessment vs post-assessment domain: Anecdotally, most criminal threats in India are misused in pre-assessment stage. That is where maximum fear is. Paper doesn’t solve this location of harm.

Suggestions

Policy Design Enhancements

·         Create a mandatory 3 tier compliance framework

Tier 1 → civil / monetary

Tier 2 → administrative sanctions (suspension of benefits, loss of fast track processing eligibility)

Tier 3 → criminal only for fraud / fabrication / concealment > threshold

·         Make fraud the only anchor for criminal prosecution — remove “willful” / “knowledge” from the criminal domain entirely.

·         Introduce statutory requirement of “loss to revenue proven / or reasonably demonstrable” as condition precedent for criminal prosecution.

·         Introduce decriminalization sunset — every 5 years offences auto lapse unless reconfirmed.

·         Create statutory economic impact statements for introduction or retention of each criminal offence (OECD style).

·         Shift burden of proof back to prosecution & codify it explicitly.

Digital Rights

·         Separate digital compelled access into national security statute not tax statute - create clear bright line: no compelled password disclosure for tax.

·         Any digital compelled access must require judicial pre-authorisation (not officer discretion).

Conclusion

This is one of the most important tax policy drafting direction papers in the last 20 years. However, there is a risk that this remains normative but NOT enforceable reform. If NITI fixes some missing parts and layers, especially in fiscal impact modelling and behavioral economics, this could become an illustrative reform for most emerging market governments.