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Anupam Manur explains why India's tax on mobile capital, combined with the state's high borrowing, is driving capital flight and starving Indian corporates of credit.
Anupam Manur is a Professor of Economics at the Takshashila Institution. His research interests lie at the intersection of economics, technology, and public policy. He writes on platform economics, international trade, India’s ongoing jobs crisis, and on economic policy. He edits the Indian Public Policy Review, a peer-reviewed and open-access journal of economics, public policy and strategy. He has also edited three books under the Takshashila Institution Press. Anupam teaches different variants of economics in all of Takshashila’s public policy programmes and is responsible for designing the curriculum for the educational programmes.
India stands alone among its emerging market peers in taxing mobile capital, charging twenty percent on short term gains and twelve percent on long term gains, a rate hiked as recently as 2024. Anupam Manur argues this is not an isolated policy quirk but a symptom of a much larger structural problem: the Indian state's persistent appetite for revenue, driven by a fiscal deficit that has stayed above five percent of GDP for years.
Manur traces how this appetite plays out on two fronts. On the taxation side, it shows up as high GST slabs, retrospective taxes, and a tendency to chase any taxable base until investors and companies start leaving. On the borrowing side, it shows up as financial repression, where instruments like the Statutory Liquidity Ratio effectively guarantee the government a captive pool of lenders inside the banking system, crowding out private borrowers. He lays out the numbers on India's savings rate versus government borrowing to show just how tight the room for private credit has become, and he closes by proposing a specific institutional fix: an independent fiscal council with real enforcement teeth, something successive Finance Commissions have recommended and successive governments have declined to create.
The notes below follow Manur's argument from the immediate problem of capital flight, through the deeper fiscal roots of that problem, to the institutional solution he proposes.
Manur, Anupam. "Fiscal Deficits, Capital Taxes, and Investment in India." Episode 78 of Big Ideas. XKDR Forum, 10th August 2026. Video, 12:24. https://www.xkdr.org/viewpoints/fiscal-deficits-capital-taxes-and-investment-in-india-big-ideas-ep-78
Manur opens by pointing out a feature of Indian tax policy that sets it apart from nearly every comparable economy.
"India is the only country in the world that taxes mobile capital."
The Indian government taxes short term capital gains at twenty percent and long term capital gains at twelve percent, a rate that was raised as recently as 2024. This runs against the global norm. South Korea does not tax capital gains at all until an investor crosses twenty-five percent ownership of a company. Taiwan, Hong Kong, and Brazil, all countries India competes with for capital, impose no such tax either.
The reason this matters more for capital than for other taxed activities, Manur argues, is mobility. A consumer paying GST on goods and services cannot simply leave the country. Capital can, and does.
This tax policy has produced capital outflows in 2023, 2024, and 2025, but Manur stresses that the effect is conditional on the global environment. When the Indian economy is doing well and global conditions are stable, the premium investors earn from being in India outweighs the friction created by taxation. Problems emerge when global conditions turn uncertain.
"When the global scenario becomes a lot more discretionary, when the global scenario becomes a lot more difficult, then you tend to have capital also becoming a lot more discretionary."
Citing recent events like the Iran war and the broader trade war, Manur notes that investors tend to flee countries with a higher risk premium and more friction, and India falls into that category. The scale of this is stark: 1.92 trillion dollars left India between January and April 2026 alone, more than the whole of 2025 combined. Manur attributes this to two compounding factors: high friction from the tax regime, and the fact that India is no longer offering investors the growth story it once did. Where India was previously the emerging market darling during periods of cheap capital and global certainty, investors are now exiting emerging markets generally, and countries like Taiwan and South Korea are offering AI-driven growth narratives that India cannot currently match.
Manur is careful to frame this as more than a one-off policy error.
"The bigger question then again remains, why do we place such a tax? The answer is systematic. It is not an error that occurred in 2024, it is not something which is out of the ordinary, but it is a systematic problem. And that systematic problem is Indian state's voracious appetite for revenue."
That appetite exists because the state spends heavily. Successive Indian governments have run a structural fiscal deficit of five percent of GDP or above, sometimes undercounted and sometimes reported more honestly, but consistently high for a developing country. This deficit has to be financed, and Manur argues that both routes used to finance it, taxation and borrowing, generate their own distinct problems.
On the taxation side, Manur points to a pattern rather than a single decision. Whether it is taxing FIIs, pursuing companies more aggressively than most other countries, or resorting to retrospective taxation, these are all different symptoms of the same underlying behavior: the state goes after any base that can be taxed.
He offers GST as an illustration. India has some of the highest GST rates in the world, including a twenty-eight percent rate on goods that would otherwise be considered essential. Officially there are four slabs, but in practice there are up to eight, structured so that wealthier, more elastic consumption bases pay more.
"We keep doing this until they exit."
The other half of deficit financing is borrowing, and here Manur distinguishes India from countries that are heavily indebted to foreign lenders. India borrows mostly domestically, and this shows up as a form of financial repression in how the government interacts with banks.
He walks through the mechanics: the Cash Reserve Ratio, a standard prudential norm, sits at around three percent, in line with global practice. But India additionally imposes a Statutory Liquidity Ratio that can run as high as eighteen percent, a figure that has been declining but remains high. Combined, this means twenty-one rupees out of every hundred rupees deposited cannot be used for lending.
"This is exceptional prudence, or is it really a way to finance government deficits?"
The SLR requirement forces banks to invest in AAA-rated and government-approved securities, most of which end up funding the government itself.
"So it's in a way having a guaranteed lender for the government."
Manur then quantifies why this borrowing pattern is so consequential. India's overall savings rate is about thirty to thirty-one percent of GDP, but government does not save, and corporates rarely do, or if they do, they tend to reinvest rather than lend. The largest saver, aside from the external sector, is the household sector.
However, much of household saving goes into unproductive assets like gold and real estate that cannot be channeled into lending. Once those are excluded, the usable financial savings figure drops sharply to just 5.1 percent of GDP.
Against that 5.1 percent, Manur totals up government borrowing needs: the union government's structural fiscal deficit of around 4.5 to 5 percent of GDP, state government fiscal deficits of about three percent of GDP, and public sector unit borrowing of about 1.5 percent of GDP. Added together, government-related borrowing runs to roughly nine percent of GDP, against just 5.1 percent of GDP in available savings.
"If the government takes away all of the money that is there by the savers, where do corporates borrow from?"
With no functioning bond market and limited long-term institutional lending in India, corporates are left with few domestic avenues to raise capital, apart from some access to external commercial borrowings. Manur connects this directly to downstream problems in job creation and investment rates.
Manur is explicit that this is not a silver bullet, but he proposes an independent fiscal council as a meaningful step. Such a body would examine government budgets and schemes, monitor expenditure, and check revenue collection, functioning as a disciplining institution on government borrowing and spending.
He contrasts this with the existing Fiscal Responsibility and Budgetary Management Act (FRBMA) of 2003, which set explicit numerical targets: a three percent fiscal deficit ceiling for the union government, three percent combined for state governments, and a target of zero revenue deficit. These targets have been routinely breached because the act lacks enforcement teeth; targets can be extended or rewritten, and there are ways around them.
"If you don't have targets and strict rules for enforcement, then any of these laws will just not make sense."
To show what a functioning constraint could look like, Manur points to the Finance Commission as a partial success story. Its recommendations on how funds should be devolved from the union government to the states have generally been adhered to once issued.
He notes that this is not a hypothetical idea waiting to be discovered: Finance Commissions from the thirteenth through the fifteenth have all recommended the creation of an independent fiscal council, and in every instance the union government has declined to act on it.
"That tells you that the union government does not want its hands to be bound in terms of its expenditure. It does not like its discretionary powers to be taken away."
Manur closes by arguing that despite this resistance, the scale of the problems created by the absence of fiscal discipline makes the case for finally establishing such a council.
"But given the magnitude of the problems by not having such discipline, I think it's time that the government bites the bullet and introduces a fiscal council."
The complete transcript file is available to download below.
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