Exploring ways for course correction
India’s GDP growth has done well over the last decade.
New highways, airports, digital public goods, and welfare schemes showcase the government’s heavy lifting in the form of public infrastructure.
But beneath this glitter lies a quiet paradox: private investment has been missing in action.
Despite liberal tax breaks and incentives, business houses stick to safe bets in cement, steel, or real estate.
Household savings can only chase stock market highs, not fund new factories or startups.
The result: Despite high GDP growth, we’re starved of new industrial investment.
This imbalance is not inconsequential. It threatens the pillars of a sustainable economy: jobs and competitiveness.
The real question is not whether India can grow fast today, but whether it can mobilize adequate capital for the emerging economy and sustain growth for the long term.
This article explores possible ways to do just that.
Why traditional industry holds back
India’s corporate conservatism has deep roots.
Most business houses grew out of centuries of risk-free trading, where the first rule was to protect wealth, not risk it on long-gestation projects.
The instinct to invest in asset-heavy, predictable sectors with government contracts as cushions still dominates.
Meanwhile, developed economies, and even China, pour billions into “high risk, higher return” sectors like semiconductors, biotech, and AI, today’s global growth engines.
India, by contrast, carries structural baggage: policy uncertainty, the scars of the NPA crisis, the high cost of capital, and the lure of stock markets that promise safe, decent returns.
Together, these explain why private capital has been content to sit on the sidelines while government spending has been fuelling the growth story, so far.
Should traditional business houses be pushed into futuristic, risky sectors?
It may be tempting to push India’s traditional business conglomerates, especially the reluctant ones, into AI, semiconductors, and green hydrogen.
But that risks a high probability of failure.
These ventures require entrepreneurial risk-taking mindsets, agility, and technological depth, which our traditional business houses often lack.
A smarter approach may be to make them anchors of capital rather than operators of risky ventures.
They can provide patient, stable funding while new-age entrepreneurs drive innovation.
Will they become anchor investors?
They may not do it willingly. Government policy interventions should nudge them in that direction.
We’ll come to this a little later.
Anchors, innovators, and the government
A new definition of roles will help:
- Traditional houses as anchors – sponsors, co-investors, and buyers of new age industry bonds.
- Entrepreneurs as innovators – building enterprises in AI, deep-tech, defence, and green energy sectors.
- Government as facilitator – creating incentives and accountability frameworks to channel capital into industry.
Why new ventures are different & essential
Tomorrow’s industries will not be yesterday’s factories with a new logo.
They will be AI-driven, data-rich, and globally networked. Running them needs fresh mindsets, not legacy habits.
India cannot afford another Vijay Mallya, Nirav Modi, or Mehul Choksi – promoters who abused public trust and misused borrowed funds.
With new age enterprises demanding large amounts of OPM (other people’s money) from banks, mutual funds, and retail investors, accountability must be stronger than ever.
But oversight must not revive inspector raj. What India needs is professional, independent, technology-enabled governance that protects public money without suffocating innovation.
Redirecting capital: The BCM Ratio
To realign capital flows, I had earlier proposed the Business-to-Capital Market (BCM) Ratio[1]:
- BCM = {Direct Investment (Equity + Debt) in Industry} / {Total Capital Market Investment}
- A healthy benchmark of about 0.5 would mean, for every ₹2 in capital markets, ₹1 flows into industry.
Today, the likely ratio is closer to 0.2, explaining why Indian stock valuations trade at very high P/E ratios, indicating too much money chasing too few stocks, often discouraging FIIs.
Monitoring and stabilizing BCM can facilitate industrial investment.
A new role for mutual funds
Indian investors already display risk appetite: small-cap and defence MFs are booming. What’s missing are structured vehicles to channel this risk appetite into industry.
Industrial mutual funds could pool capital into MSMEs, defence, AI, and green energy.
Investors trust fund managers more than opaque SME IPOs. Conglomerates could act as anchor investors, providing the critical mass.
Israel, the US, and the UK have shown this model works. India should not hesitate.
A new mindset for banks
Banks must also evolve. Scarred by bad loans, they remain risk-averse, lending only to large, collateral-heavy projects.
But sunrise sectors rarely come with tangible assets or predictable revenues.
India needs either a re-oriented banking mindset or specialized innovation and development banks designed to underwrite higher risks. Without this, financing the future will be a pipe dream.
Policy carrots and sticks
The government’s role is to make the safe path less attractive and the bold path rewarding:
- Carrots: Preferential tax breaks for new-age industrial MFs, sovereign co-investment, fast-track clearances, and performance-linked compensation for managers using OPM.
- Sticks: Disincentives for over-expansion in saturated sectors, mandatory R&D allocations (including into R&D-focused funds), and independent oversight for startups using pooled capital.
Don’t forget cooperatives
Beyond big capital, India’s cooperative tradition can be a second pillar.
If industrial MFs channel urban money into industry, co-ops can do the same for villages, creating rural jobs and complementing market-based vehicles.
The payoffs
- Jobs: Millions more in both high-tech and labour-intensive industries.
- Stability: Less speculative froth, healthier markets.
- Competitiveness: Domestic capital driving sunrise sectors will reduce foreign dependence.
- Inclusivity: Even small savers and rural youth join the growth story.
Moving up the value chain: From a trading nation to a technology leader
India’s growth story is impressive, but incomplete.
If private industrial investment continues to lag, GDP risks becoming a hollow headline.
Traditional business houses must evolve into anchors of national risk capital, entrepreneurs into bold innovators, banks into enablers, and small savers into business partners.
This is the fine balancing act – protecting the system while unleashing its true potential.
Note:
1. Text in Blue points to additional data on the topic.
2. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.
Reference:
[1] For more private investment & jobs: Shift investment from capital markets to industry – Mar 13, 2025, PGurus.com
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