Economic Survey: Debt market reforms, tax and regulatory fixes suggested

Indian households have embraced equities, extending that confidence to debt markets "next frontier"

The Economic Survey 2026, tabled in Parliament on Thursday, has called for a series of measures to deepen long-term finance in India, including rationalising the tax treatment of debt instruments, better coordination among financial regulators, and reforms in the insolvency framework to bolster investor confidence.

 

The Survey noted that while Indian households have increasingly embraced equities, extending that confidence to debt markets is the next frontier for building resilient portfolios and a mature financial system.

 

Chief Economic Advisor (CEA) V Anantha Nageswaran, in the Survey, stated that India’s corporate bond market remains underdeveloped, accounting for around 16-17 per cent of gross domestic product (GDP), compared with equity market capitalisation of over 130 per cent of GDP. In contrast, corporate bond markets in the US and China constitute approximately 40 per cent and 36 per cent of GDP, respectively, as of 2024.

 

“Coordinated and phased reforms are the need of the hour. These include streamlining inter-agency alignment through joint circulars that clarify responsibilities across the regulators, as well as establishing single-window contact systems for issuers,” the Survey highlighted.

 

To enhance investor confidence, the Survey called for improving the effectiveness of the insolvency framework to accelerate recovery timelines, along with upgrading market infrastructure through a unified trading framework.

 

“Long term structural development should prioritise upgrading market infrastructure through unified trading platforms and enhanced market-making capabilities while expanding the investor base through targeted incentives, including simplified tax structures for bonds and regulatory flexibility for pension funds and insurance companies to invest in mid-rated securities,” it said.

 

There has been a long-standing demand from the mutual fund industry for tax benefits on debt instruments, including the restoration of the long-term indexation benefit for debt schemes, which was withdrawn in the Budget 2024.

 

The Association of Mutual Funds in India (Amfi), in its Budget suggestions for this year, has called for the restoration of the benefits, removal of which has led to a sharp reduction in net inflows into debt mutual funds over the past three years.

 

It added that restoring indexation would incentivise long-horizon fixed-income savings, restore parity with other long-term assets, and help channel household savings into the corporate bond market.

 

The industry body has also called for the introduction of a Debt-Linked Savings Scheme (DLSS), akin to the Equity-Linked Savings Scheme (ELSS), with a five-year lock-in and a separate deduction outside Section 80C of the Income Tax Act.

 

Among the concerns emphasised by the Economic Survey were the shallow and illiquid nature of corporate bond markets, their dominance by top-rated issuers, and limited securitisation activity.

 

While acknowledging measures taken by the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) — such as the request-for-quote platform, steps to facilitate retail participation, focus on InvITs, and enhancements to the settlement architecture through tri-party repos and credit default swap guidelines — the Survey said more coordinated action is required.

 

“Supported by Sebi’s relaxation of FPI (foreign portfolio investor) investment norms and ongoing India-US trade discussions, the outlook for FPI inflows into India’s debt market remains positive,” the Survey added.

 

Citing a Niti Aayog report, the Survey said: “Limitations also stem from regulatory overlaps between Sebi, RBI, and the Ministry of Corporate Affairs (MCA); extensive disclosure requirements that deter lower-rated issuers; restricted investment mandates for institutional investors, limiting their allocation to high-grade securities; and an underdeveloped risk-management infrastructure.”

 

It added that weak debt recovery mechanisms, high transaction costs, and tax asymmetries continue to dampen investor appetite and constrain the flow of long-term capital.

 

Currently, average daily secondary market volumes range between ₹7,000 crore and ₹10,000 crore, with only a small group of institutional investors participating in the primary market — limiting the availability of bonds for secondary trading.

 

The Survey said a vibrant corporate bond market could lower the cost of capital for Indian firms through competitive pricing, improved liquidity, and efficient price discovery. As the market deepens, intermediation costs should decline, particularly for the mid-market segment, which is expected to drive much of India’s manufacturing growth and job creation.

 

It added that alongside transparency, there is a need to price risk honestly “beyond the siloes” of AAA-rated bonds, and that mechanisms such as partial guarantees and blended finance could help mid-tier issuers access bond markets.