Economic Adviser Calls for Lower Debt Taxes

India needs to lower its cost of capital and expand financing options beyond banks to sustain long-term growth, the government’s annual Economic Survey said on Thursday.

The survey, authored by Chief Economic Adviser V. Anantha Nageswaran and released ahead of the Union Budget, urged the government to rationalise the tax treatment of debt instruments to deepen capital markets. While the government is not obliged to accept the recommendations, the survey often shapes policy debate.

Currently, India taxes debt instruments at an investor’s applicable income tax slab, which can go up to 40%, while equity investments attract lower capital gains tax rates. According to the survey, this disparity pushes investors towards equities and reduces liquidity in debt markets. Lower taxes on debt instruments would help balance investor preferences and support long-term financing needs.

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India Should Cut Debt Taxes, Broaden Financing Beyond Banks: Economic Survey

To further reduce borrowing costs, the survey proposed credit enhancement facilities for lower-rated borrowers, enabling them to raise funds more cheaply. It also called for a revision of investment guidelines for long-term funds to mobilise patient capital for infrastructure and climate-related projects.

“These reforms would provide the scale and maturity required for infrastructure and climate financing while lowering the economy’s cost of capital,” the survey said.

Push for Activity-Based Regulation

The Economic Survey highlighted the need for stronger regulatory coordination across India’s financial system, which multiple domain-specific regulators currently oversee.

To curb regulatory arbitrage—where firms exploit gaps between regulatory frameworks—the survey recommended shifting from entity-based supervision to activity-based regulation. Such a move, it said, would ensure consistent oversight across similar financial activities and close loopholes in the system.

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