When fiscal policy is discussed, attention almost always narrows to the Union government’s fiscal or revenue deficit. That frame is incomplete. It excludes state governments, local bodies, and a large universe of public sector undertakings whose liabilities never enter headline deficit numbers.
Even at the Centre, consolidated public sector finances remain outside the discussion. This selective accounting weakens fiscal diagnosis and obscures where the real pressures lie.
READ | Budget 2026: Macro factors limits policy space for FM
The myth of 3% taxpayers
The claim that only 3% of Indians pay income tax is arithmetically careless. It appears to be derived by dividing the number of assessees by the total population, including children and those not yet born.
India has roughly 35 crore families. A substantial share is legitimately outside the income tax net, including agricultural households. That does not imply absence of taxable capacity.
Roughly 10 crore individuals filed income tax returns last year, out of about 17 crore in the tax-eligible population. Nearly half the population is already within the compliance framework, even if many pay little or no tax.
This is not a crisis of coverage. It is a question of structure.
Agriculture income tax a holy grail
There is significant untapped tax potential in agricultural incomes. Across poultry, plantation crops, spices, and cash crops, large concentrations of wealth exist. Luxury vehicle sales data already hints at this reality. Many buyers are classified as “farmers.”
READ | Budget 2026: The fiscal arithmetic is getting harder
The political resistance is well rehearsed. When Ashok Mitra introduced agricultural income tax in West Bengal, it was withdrawn after public uproar. Even a passing reference to the subject now invites disproportionate backlash. The result is a system where large agricultural fortunes remain entirely untouched.
If the tax base is to expand without overburdening urban salaries, states must be encouraged to act. The constitutional design places agricultural income taxation with state governments. Avoiding it indefinitely is neither equitable nor fiscally sustainable.
Simplification, not proliferation, of tax law
India demonstrated political capacity when it implemented the Goods and Services Tax, merging over twenty state and central indirect tax regimes. The European Union has attempted something similar for decades without success.
The same resolve is required for direct taxes. A citizen should be able to file a return without an intermediary, without fear, and without a chartered accountant.
The slab structure is unnecessarily complex. A simple framework would suffice: no tax up to ₹10 lakh, three slabs thereafter, and taxation continuing even beyond the age of 70 for high incomes. Rates of 10%, 20%, and 30% are enough. Deductions and exemptions should be eliminated.
German and Singaporean tax forms are one page. India should not require more.
Transmission failure in fiscal and monetary policy
Corporate tax reductions and rate rationalisation in recent budgets have not reached the final consumer. Monetary transmission has fared no better. Marginal rate cuts are absorbed by banks rather than passed on.
Only about 30–35% of Indian households access credit through banks and NBFCs. The rest rely on family networks, moneylenders, and informal associations, often at two to three times the formal interest rate. Policy attention remains disproportionately focused on the formal segment.
The unseen drain: State public enterprises
There are over 1,000 state-level public enterprises. Even the exact number is contested between official agencies. Of these, nearly 800 have not finalised accounts since 2015–16.
This would be untenable in the private sector. Yet these entities continue, accumulating losses, perks, and political patronage. Chairpersons receive official vehicles and privileges while basic accountability is absent.
When public sector reform is discussed, attention jumps to central enterprises and high-profile institutions. State-level enterprises remain invisible, despite being a significant fiscal drag.
READ | The big question for Budget 2026
Freebies and collapse of fiscal discipline
Unconditional cash transfers and universal subsidies have crossed from welfare into electoral bribery. Recent announcements of cash payments to all ration card holders, or free public transport without income differentiation, illustrate the problem.
These programmes strain state finances and hollow out fiscal credibility. Below the state level, the situation worsens. Most municipalities are not self-sustaining, raise little revenue, and depend entirely on state grants. Corruption at this tier is systemic.
Household savings: A statistical illusion
The decline in household savings as a share of GDP is often overstated. Much of it reflects reclassification. Proprietorships and partnerships were redefined as “quasi-corporate” entities, shifting savings out of the household category.
The unresolved problem is separating consuming households from producing households. This flaw has existed for over a decade and is now under revision.
Domestic household savings have contributed more to India’s growth than foreign capital inflows. They underpin the “Viksit Bharat” narrative. This growth has occurred largely despite the state, not because of it.
Ease of doing business means little if daily transactions depend on cash payments and petty bribery. Corruption is concentrated at the lowest administrative levels.
Post-war Europe criminalised possession of large amounts of unexplained cash. India should consider a similar threshold. Bribes are still paid in cash. Reform cannot begin at the top alone. It must start from below.