‘Early warning sign…’: Former RBI Gov Subbarao on what FM Sitharaman can fix in Budget 2026

Former RBI governor Duvvuri Subbarao, in a letter to Finance Minister Nirmala Sitharaman ahead of Union Budget 2026, said repeated tinkering with capital gains taxation has eroded policy credibility. Subbarao said FM Sitharaman should not ignore the early signal of capital outflows. 

In the letter published in Times of India, Subbarao said that while her budgets are arithmetically sound, the criticism that is often directed is that they lack zing. He said she could make a budget rooted in the theme of Viksit Bharat. 

Subbarao said in his letter that there are concerns about the quality of growth, adding that productivity growth is disappointing and that private investment is sluggish. Employment generation is weak, manufacturing has not emerged as the labour absorbing engine, and then there are the high tariffs as well as the geopolitical tensions.

“One early warning signal that you should not ignore is capital outflows. Foreign investors have been taking money out of India, driven by both push and pull factors. Higher interest rates in advanced economies and the allure of investment in AI are pulling capital away,” he said.

Subbarao said that “repeated tinkering with capital gains taxation, combined with a complex and often unpredictable withholding tax regime has eroded policy credibility”. He said investors value clarity and stability, apart from returns.

The former governor said in making the transition from fiscal deficit to debt-to-GDP, she should not lose sight of the older and relevant metric, revenue deficit.

He said becoming a developed country is not just about increasing the per capita threshold but also creating productive jobs, raising human capital, improving state capacity, reducing inequality, and ensuring sustainable and inclusive growth. “None of this will happen by accident, and none of it will happen through annual budgets that are disconnected from a longer-term plan,” said Subbarao. 

Subbarao conceded that FM Sitharaman has the unenviable job of making hard decisions to secure the economy’s long-term sustainability. “But that is precisely why we elect leaders – to make difficult choices,” he said.