A lousy tax system
But the debt isn't because of excessive spending in the past. India's government expenditures amount to about 15% of GDP, compared to an average of around 40% of GDP in the OECD. Rather, India's financial difficulties stem from a badly designed and administered tax system. Rates and rules for personal and corporate income taxes appear reasonable by international standards. Nonetheless, India's government collects income taxes amounting to only about 3.7% of GDP, about half that in South Korea and the other Asian tigers.
Agriculture in India accounts for about a quarter of GDP, but even wealthy farmers don't pay taxes. Export-oriented companies in the software and other industries enjoy tax holidays on their profits, although their employees do pay taxes on their personal incomes. Despite reasonable rates, tax evasion is widespread. "
From Amar Bhide's article on tax system in India