The new deregulation effort targets barriers for SMEs, unlike earlier initiatives focused on broad legal and regulatory changes
Excess financialization persists in pockets, with IPOs often providing exits rather than expanding businesses, though reinvestment is possible
A pollution tax requires careful study and precise targeting, as good ideas can face unintended consequences in practice
While considering a measure like a pollution tax in India, there needs to be careful thought about the intended results and the scope for unintended consequences, says V Anantha Nageswaran, Chief Economic Adviser (CEA) to the Government of India, who presented the Economic Survey on Thursday.
The survey, which ran over 700 pages this time, noted that traditionally, environmental regulation has been guided by Pigouvian welfare economics and command-and-control approaches, which prescribe emission standards or technology norms that provide certainty but often impose high compliance costs and weak incentives for innovation.
1 January 2026
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“This approach often entails higher compliance costs and may weaken incentives for innovation. In contrast, market-based instruments such as pollution taxes, tradable permits, and emissions trading, offer greater flexibility and cost efficiency,” it read.
In an exclusive interview with Outlook Business, the government’s top economist, however, suggests that such ideas need to be carefully studied before they can be turned into policy proposals. “We need to make sure that this can be targeted at the exact polluters, and getting the level and the rate right may not be that easy,” says Nageswaran.
“That is why they say in public policy that the road to hell is paved with good intentions,” he adds.
Nageswaran presented the Survey ahead of the Union Budget, as is customary for the CEA. Apart from the pollution tax, he also discusses some observations related to finance and markets. Edited excerpts:
How is this deregulation exercise that you have kick-started different from earlier ease of doing business initiatives?
We didn’t kick-start it. We kind of catalysed it by talking about it in the Economic Survey, which then got picked up by the government, at the direction of the Hon’ble Prime Minister.
The Cabinet Secretariat drove this, to be very clear. Look how different they are—I have no idea. But the important thing is that this one gets into the nitty-gritty, nuts and bolts of process reforms at the state level. I think that’s the important thing.
Most ease-of-doing-business efforts are focused on many legal and regulatory changes. But this one looks at what holds back small and medium enterprises, and what instils in them the fear of growth. Let’s remove them—that’s the focus here.
How exposed is India to financial contagion if the AI boom fails and asset valuations correct?
I don’t think India is particularly exposed, except to the extent that the financial sector—the financial markets—could have a contagion effect because all markets drop and investor sentiment becomes a little weaker, and so on.
But even in 2007–08, India wasn’t as badly impacted, although there was some exposure for some mutual funds in 2007–08. This time, I think the direct impact on India will be limited—in fact, even smaller than last time.
If anything, it will only be because of the way financial market contagion spreads across countries. And it may even open up India further. In fact, paradoxically, it may reinforce the notion of India being an oasis.
Experts point out that liquidity from the surge in domestic savings into equity markets has offered foreign investors attractive exit opportunities, while high valuations have limited their entry points.
These are very perceptive questions. I appreciate these remarks, but it’s difficult for me to speculate on it. Probably yes, to the extent that domestic investors have picked up the slack, and because of that the valuations haven’t declined meaningfully to become attractive entry points.
Yes, that could be an impact. But ultimately, investors have to match the price with the earnings potential they are looking at. As long as the E keeps growing, the P can be justified. Otherwise, the P has to come down to match the expectations of the E.
These are things that the markets will eventually sort themselves out, because they go up and down in cycles.
Outside your Survey presentation, you have been vocal about the issue of excess financialization, which many believe is also a cause of income disparities across the world. Can it also be seen as a drag on capital formation?
This is again quite perceptive. But I would be careful not to overstress this point. There are pockets of financialisation in the country, but while we have made a lot of progress in financial inclusion, we have still not completely cracked it.
To that extent, we can still achieve financial deepening. But there are pockets of financialisation, for sure. And whether IPO money necessarily indicates financialisation—yes, I did comment on it a couple of months ago when I said that to the extent that IPOs only provide exit opportunities and are not for further expansion of businesses, it is a lost opportunity.
But again, one can offer a counter-argument to that proposition: if PE/VC investors get an exit, they can recycle and funnel the money into other investments in the real economy as well.
So I think it is important to flag or voice these concerns so that we don’t go overboard in one direction. But it is difficult to get any more precise than this.
The Survey mentions a pollution tax. We are currently in a situation where pollution levels keep rising, even as we remain below desired levels of investment and growth. Do you think this tax needs to be seriously considered?
I don’t think it’s possible for me to respond off the cuff to a topic as important as a pollution tax, because in many of these proposals we need to look at the intended results and the scope for unintended consequences, and whether they will achieve the end result or simply end up raising costs.
So we need to make sure that this can be targeted at the exact polluters, and getting the level and the rate right may not be that easy. It’s not that the idea is flawed. But we all know that many things that are conceptually sound and elegant, when translated into practice, are met with the law of unintended consequences.
That is why they say in public policy that the road to hell is paved with good intentions. So we would like to study this dimension before responding on the aspect of a pollution tax. I don’t have an answer to this question as of now.
The former Secretary of Economic Affairs suggested separate credit ratings for state governments due to weak fiscal incentives. In the context of the Survey’s chapter on state finances, does this idea become more relevant?
It is a good idea. We need to think of multiple ways in which we can bring about a certain sense of fiscal prudence and fiscal stability to state finances. But whether this specific idea is the one we should pursue, or whether there are other ideas, is something we need to reflect on carefully.
For the same reason I mentioned in response to your earlier question, we should be mindful of the unintended consequences of what we are trying to do, and we should not undermine current stability, especially in a difficult global environment.
Therefore, while we all understand the importance of overall fiscal prudence at the general government level, the question is how we get there. We need to be careful about the avenues we pursue, and rather than saying this is the answer or that is the answer, we need to do some homework before we are able to zero in on a specific approach.
