As India prepares for Union Budget 2026-27 scheduled for February 1, 2026, corporate India is hoping for clarity on taxes, reforms, and policy priorities that can unlock the next leg of economic momentum toward achieving the $5-trillion economy goal. According to industry experts, capex growth is expected to stay central on the agenda, while addressing opportunities in AI-led growth, digital infrastructure, manufacturing expansion, and energy transition.

Critical Role of Alternative Investment Funds

Alternative Investment Funds (AIFs) play a critical role in financing parts of the economy where traditional channels are less effective. Rajini Vislavath, CIO Alternatives at LGT Wealth India, emphasizes how early-stage companies, infrastructure projects, stressed or transitional assets, and MSMEs increasingly rely on patient, risk-tolerant capital.

The expert notes that private equity, venture capital, private credit, and real asset funds are no longer niche products but have become essential components of long-term capital allocation. However, despite strong demand and a growing domestic savings pool, India's AIF ecosystem remains constrained by structural and policy frictions.

Key Reform Areas for AIF Growth

Vislavath outlines several targeted steps needed to meaningfully expand India's alternative investment base:

Strategic Sector Focus

The expert recommends strategic policy emphasis on key growth sectors where AIFs can have transformative impact:

• Technology and Deep Tech: AI, semiconductors, biotech
• Renewables and Transition Finance: Energy sector transformation
• Logistics and Supply Chain Infrastructure: Operational efficiency improvements
• Healthcare: Innovation and accessibility enhancement

Incentives, whether fiscal, regulatory, or infrastructure-related, can steer private capital into these strategic domains, accelerating innovation and competitiveness.

Long-term Capital Confidence

From a fund manager's perspective, the Budget's importance lies less in immediate inflows and more in the signal it sends to long-term capital. Alternative investments are built on trust that capital can be deployed efficiently, returns realized predictably, and policies applied consistently.

If the Budget addresses core structural issues around taxation, access, and regulatory clarity, it will reinforce India's position as a credible and competitive destination for alternative capital. This approach can support entrepreneurship, infrastructure creation, and credit expansion without increasing the fiscal burden on the state.

The market seeks not dramatic reform, but thoughtful, durable change that enables confidence and long-term participation in India's economic growth story.

Retail investors have demonstrated remarkable commitment to Indian markets despite facing multiple challenges including the pandemic, global rate shocks, and geopolitical turmoil. Their sustained engagement reflects a growing belief that Indian capital markets are maturing into a credible platform for long-term wealth creation. However, this confidence requires continuous reinforcement as investors' financial commitments expand annually.

Tax Structure Challenges in Global Context

India's capital market taxation faces significant competitiveness issues when viewed globally. The Securities Transaction Tax (STT) represents a key concern, as India remains among the few major equity markets imposing transaction-level taxes on every trade. This approach contrasts sharply with international practices:

STT creates a fundamental issue as it applies regardless of profitability, effectively becoming a tax on market participation itself. Recent years have seen STT increases to relatively high levels, making relief a priority for market sentiment improvement.

Commodity and Capital Gains Tax Concerns

The Commodities Transaction Tax (CTT), introduced in 2013 on non-agricultural commodities, has significantly impacted trading volumes. This undermines the objective of building deeper, more efficient commodity markets essential for supporting industrial users and infrastructure development.

Long-term Capital Gains (LTCG) tax presents another area requiring attention. India controversially reintroduced LTCG on listed equities in 2018, while global practices vary significantly:

• United States: Taxes long-term gains with holding period incentives and inflation adjustments
• European countries: Light taxation or exemptions under specific conditions
• Singapore and Hong Kong: No capital gains taxation

The primary concern centers on predictability rather than rates, particularly for foreign portfolio investors facing interpretational challenges and treaty uncertainties.

Retail Investor Market Participation

Current market structure shows substantial retail investor involvement:

This represents a structural shift requiring careful nurturing. The SIP culture has transformed Indian markets, with monthly inflows providing steady counterbalance to volatile global flows. However, retail investors remain extremely sensitive to tax changes, particularly sudden shifts affecting debt or hybrid funds.

Infrastructure and Fiscal Policy Recommendations

The economy requires momentum through decisive government capital expenditure expansion, particularly in defence. Political instability across South Asia emphasizes India's position as the region's only stable democracy, necessitating higher national security investment.

Current government expenditure structure presents rebalancing opportunities:

Maintaining fiscal discipline below 5% while increasing capex requires sharp revenue expenditure curtailment. With inflation at relatively low levels, conditions appear favorable for launching an ambitious multi-year National Infrastructure Plan.

Market Development Priorities

Over 500 companies have raised capital through India's IPO markets in the last two years, reflecting growing entrepreneurial momentum. This demonstrates how private ambition meets public participation, with retail investors playing increasingly important roles.

For sustained domestic capital formation, mutual funds require predictable, long-term tax treatment. The objective should maintain household savings within the formal financial system, avoiding migration toward unproductive assets like real estate or low-yield bank deposits.

Long-term equity ownership must receive active encouragement if policymakers want patient capital funding capex cycles, innovation, and business expansion. The scale advantage of over 13 crore unique demat accounts can compensate for lower tax rates through higher volumes, while widening the tax base unlocks substantial government revenues through direct taxes and indirect levies.