India urged to ease debt taxes, boost affordable capital.
India should take decisive steps to lower the cost of capital and broaden financing options beyond traditional bank lending if it wants to sustain long-term economic growth, the government’s annual Economic Survey said on Thursday. The recommendations reflect growing concern that India’s current financial structure places too much pressure on banks while discouraging the development of deep, resilient capital markets.
At the centre of the survey’s proposal is a call to rationalise the tax treatment of debt instruments. The survey argued that India must strengthen its long-term capital markets to fund sustained growth, and that this will require a coordinated policy agenda. Reducing taxes on debt instruments, it said, would be a crucial part of that effort.
Currently, debt instruments in India are taxed according to an investor’s personal income tax slab, which can go as high as 40 per cent. In contrast, equity investments enjoy far more favourable treatment. Short-term capital gains on equity are taxed at a flat 20 per cent if held for less than a year, while long-term gains are taxed at just 12.5 per cent. This sharp difference, the survey noted, nudges investors toward equity and away from debt.
While equity markets have benefited from this structure, debt markets have suffered. Higher taxes reduce investor appetite for bonds and other debt instruments, hurting liquidity and raising borrowing costs for companies that rely on them. As a result, firms — especially those that are smaller or lower-rated — often end up paying more to raise funds or are pushed back toward bank loans, further straining the banking system.
The survey argued that lowering taxes on debt instruments would help level the playing field, encourage a wider investor base, and make debt financing more attractive. Over time, this could reduce borrowing costs, improve market depth, and give companies more flexibility in how they finance expansion.
Beyond tax changes, the Economic Survey also recommended introducing credit enhancement facilities for lower-rated borrowers. Such mechanisms could help these borrowers raise funds at lower interest rates by reducing perceived risk for investors. This, the survey said, would support inclusive growth by improving access to capital for firms that currently struggle to tap markets on reasonable terms.
The survey also suggested revisiting investment guidelines for long-term funds, such as pension and insurance funds, to better align them with the goal of supporting long-term infrastructure and development financing. These institutions, it noted, are naturally suited to provide stable, patient capital but are often constrained by conservative rules.
Separately, the Economic Survey raised concerns about India’s regulatory architecture, which is currently overseen by multiple domain-specific regulators. It called for stronger coordination and a shift toward activity-based regulation rather than entity-based oversight.
To prevent regulatory arbitrage — where firms exploit gaps between regulators to benefit from lighter rules — the survey said regulation should focus on the nature of financial activities themselves, regardless of who performs them. Such a shift, it argued, would make oversight more effective and keep pace with increasingly complex financial products.
Taken together, the survey’s recommendations paint a picture of an economy at a crossroads. To sustain growth, it suggests, India must move beyond bank-heavy financing, fix tax distortions, and modernise regulation — steps that could quietly but fundamentally reshape how capital flows through the economy.