Tax: Economic Survey Urges Reform and Deeper Capital Markets for Growth

Tax: The Economic Survey for 2025–26 has outlined a broad reform agenda aimed at improving policy certainty, unlocking long-term investment, and supporting India’s ambition of becoming a developed economy by mid-century. Presented in Parliament on Thursday, the Survey stresses that economic progress will depend less on higher public spending and more on creating systems that allow businesses and households to invest, save, and grow with confidence.

Rethinking Finance as an Engine of Transformation

According to the Survey, achieving the goal of a developed India requires a fresh view of finance, not simply as a source of funding but as a core framework that shapes economic transformation. It argues that sustainable development comes from expanding the productive base of the economy, enabling firms to scale up, workers to earn steadily, and markets to allocate capital efficiently. This, it notes, can only happen in an environment built on transparent administration, competitive regulation, and predictable policies.

Call for Simpler and Predictable Taxation

A key recommendation of the Survey is the need to simplify the tax system. It calls for a more service-oriented tax administration that reduces complexity and compliance burdens. Alongside simplification, the document stresses the importance of resolving tax disputes within clearly defined timelines and decriminalising minor technical offences. Such steps, it says, would reduce uncertainty for businesses and investors, encouraging them to take long-term decisions without fear of prolonged litigation.

Role of Regulators and Financial Infrastructure

The Survey highlights the role of regulators in balancing innovation with stability. Regulatory institutions are urged to promote competition and new ideas while maintaining financial discipline. It also points out that India’s credit system remains heavily dependent on banks, limiting the availability of diverse funding options. To address this, the Survey calls for deeper capital markets supported by modern financial infrastructure that can broaden access to credit beyond traditional channels.

Strengthening Long-Term Capital Markets

Financing sustained economic expansion, particularly in infrastructure and climate-related projects, will require stronger long-term capital markets. The Survey projects economic growth of 6.8 to 7.2 percent in the 2026–27 financial year and raises India’s medium-term growth potential to around 7 percent. However, it warns that current market structures may not be sufficient to support this trajectory without significant reforms.

Structural Gaps in Debt and Bond Markets

The document notes that corporate bond markets in India remain narrow and lack liquidity, with activity concentrated among highly rated issuers. Other segments, such as securitisation and municipal bonds, are described as underdeveloped. In addition, pension and insurance funds tend to invest conservatively, a pattern the Survey attributes to regulatory constraints and institutional inertia rather than a lack of opportunity.

Proposed Agenda to Unlock Capital

To overcome these challenges, the Survey outlines a six-point reform plan. This includes rationalising the tax treatment of debt instruments, setting up credit enhancement mechanisms for lower-rated borrowers, and standardising securitisation frameworks and disclosures. It also recommends strengthening municipal finance through pooled bond structures and revisiting investment norms for long-term institutional funds. Together, these measures are expected to improve access to capital and extend maturities for large-scale projects.

Addressing the High Cost of Capital

The Survey acknowledges that India’s relatively high cost of capital remains a persistent barrier to private investment. Data cited in the report shows that average long-term interest rates in India over the past three decades have been significantly higher than those in several advanced economies, though still lower than in many other emerging markets. Reducing this cost, it argues, will require attention not only to financial systems but also to broader economic fundamentals.

Boosting Productivity and Global Integration

Finally, the Survey emphasises the need for policies that support firm-level growth, deregulation, and efficiency. Improvements in logistics, infrastructure, and trade facilitation, along with stronger investment in research and development, are seen as essential for raising productivity. Greater integration into global value chains, the Survey concludes, can help strengthen manufacturing margins and generate the surpluses needed to sustain long-term growth.