5 min readJun 14, 2026 06:40 AM IST
First published on: Jun 14, 2026 at 06:40 AM IST
The economic situation at the close of May 2026 was quite dismal. There was a flurry of government activity at the start of June. The RBI announced a significant measure — the Fully Accessible Route (FAR) to government bonds was expanded to include new 15-year, 30-year and 40-year government bonds for investment by foreign investors. Besides, several limits and caps on foreign portfolio investors were removed. Simultaneously, the government promulgated an Ordinance to exempt foreign investors from long-term capital gains (12.5 per cent) and withholding tax (20 per cent) on sale of the bonds. RBI also allowed banks to attract FCNR (B) deposits with a generous offer to cover the hedging costs.
These are tried and tested measures. They are expected to attract more foreign currency inflows: the estimate is USD 30-40 billion — may be more — to augment the foreign exchange reserves. The depreciation of the rupee may be stemmed: the sliding rupee had become a political issue for the Hon’ble prime minister who promised in 2014 that the rupee-dollar exchange rate will be controlled at Rs 40, much like King Canute ordering the tide to halt!
No other option
There are risks. We need not dwell on the risks now because there were no other options before the government and the RBI. The risks of doing nothing were greater. The government was in denial for many months, especially since the imposition of the Trump-tariffs, the US-Israel vs Iran war, the oil price shock, and the derailment of the supply chains. Foreign investors were wary of investing in India. The consequences were showing up in the numbers and yet the alarm bells were not ringing in the government:
- The current account deficit (CAD) was growing every month and the year 2025-26 is expected to have closed with over USD 25 billion. Adding to the worries, the estimate of the goods trade deficit for the year is USD 333 billion and the estimate of gold imports is USD 72 billion. We know where the shoe pinches.
- Net FDI was a paltry USD 6.9 billion, showing the lack of confidence of foreign investors in the prospects of the Indian economy and in the stock market. In most months of 2025-26 foreign investors in the Indian equity market were net sellers, reaching a high of Rs 1,17,775 crore in March 2026.
- Gross Fixed Capital Formation (GFCF) at constant prices has been stuck at 32.3 per cent since 2022-23. GFCF is more or less equally divided among the government sector, the household sector (real estate and construction) and the private sector. Despite persuasion, cajolery, threats and investment summits, the private sector is unwilling to step up investment, especially in manufacturing. The share of manufacturing in GVA at constant prices (GDP = GVA + net taxes on goods) has been stuck at 17 per cent for many years under the NDA.
Not resilient, but fragile
The complacency was induced by the RBI’s monthly bulletins and the Ministry of Finance’s monthly reviews. Many knowledgeable economists pointed out that the two reports were too sanguine and hid the real picture and the potential threats. The word constantly used by the government’s spokespersons was ‘resilience’, but experts pointed out that the word was a thin cover for ‘fragility’.
The government may be tempted to stop with these measures, but that would be a huge mistake. In an interview to Marya Shakil of India Today, Mr Anantha Nageswaran, Chief Economic Adviser, summarised the government’s current thinking. On imposing restrictions on gold imports, he evaded a direct answer, and said that he was “not aware of” any restrictions that may be imposed on gold imports. He is the chief
adviser, he must have a view, and he must have rendered his advice. Naturally, he is reticent in public because he is aware of Mr Narendra Modi’s words in 2013-14 (“FM is stealing your mangalsutra) when the then government had placed severe restrictions on gold imports. I am afraid the government has no choice but to throw some sand in the wheels of gold imports.
Acknowledge challenges
Moreover, the government must acknowledge that household debt has risen (41 per cent of GDP), household financial savings have decreased (< 6 per cent of GDP), and consumption expenditure has fallen (except among the small sliver of people who buy luxury goods). The government must not believe the self-serving numbers that the MoSPI and ministries put forth on ‘achievements’. It must put money in the hands of the people. There are several ways to do that: raise minimum wages to match inflation, cut taxes on consumption, scrap vanity and environmentally harmful projects like the Great Nicobar container port-cum-airport, scale up the number of educational loans, restore labour-intensive public works like MGNREGS and, unlike in 2025-26, spend the allocated funds fully on drinking water, village roads, rural development schemes and urban housing.
Government must — and prevail upon state governments to — fill the vacancies in sanctioned government posts particularly in Class III and IV, and posts of doctors, teachers, nurses, jawans in police forces and central armed police forces, workmen in the Indian Railway, etc. to which the youth of the middle classes and lower middle classes aspire.
There are objectives before the government that will galvanise and instill hope in the people. Mr Modi should devote his energy to pursue those objectives rather than waste his time chasing divisive, polarising and unproductive goals.
There are objectives before the government that will galvanise and instill hope in the people. Mr Modi should devote his energy to pursue those objectives rather than waste his time chasing divisive, polarising and unproductive goals. 
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