[Answered] Examine the structural reforms required to transition India’s financial ecosystem from quantity to quality. Analyze how rebuilding domestic savings and improving capital efficiency, alongside leveraging startups, act as mutually reinforcing pillars for achieving the ‘Viksit Bharat @ 2047’ vision.

Introduction

India’s aspiration of becoming a developed economy by 2047, envisaged in Viksit Bharat @ 2047, demands not merely higher investment but a qualitative transformation of its financial ecosystem, as highlighted by the World Bank and RBI.

From Quantity to Quality: Reimagining India’s Financial Architecture

1. India’s growth strategy has historically emphasised capital accumulation, reflected in high investment-to-GDP ratios.
2. However, international experience (East Asia, OECD economies) shows that long-term growth hinges on capital productivity, stability of financing, and institutional depth.
3. With an Incremental Capital Output Ratio (ICOR) of around 4–5.5, India risks diminishing returns unless financial reforms focus on quality rather than volume.

Rebuilding Domestic Savings: The Bedrock of Sustainable Growth

1. Domestic savings are the least volatile and most sovereign source of capital, insulating India from global financial shocks, as seen during the 2008 crisis and the 2013 taper tantrum.
2. Yet, RBI data shows net household financial savings fell to nearly 5.3% of GDP in FY23, while household debt crossed 40% of GDP, signalling consumption-led leverage rather than asset creation.

Reform Pathways

1. Financialisation of savings: Shifting household wealth from gold and real estate to financial assets through pensions, insurance, and capital markets.
2. Strengthening long-term vehicles: Expanding the National Pension System (NPS) and deepening insurance penetration, aligned with OECD pension best practices.
3. Digital enablers: Platforms like Unified Lending Interface (ULI) and JAM trinity can channel small savings into productive investments. Domestic savings thus form the first pillar, creating a stable pool for long-term capital formation.

Market-Based Long-Term Financing: Correcting the ALM Mismatch

1. Limits of Bank-Centric Growth: Indian banks, despite improved balance sheets, face structural Asset-Liability Mismatch (ALM) due to short-term deposits funding long-gestation projects. Global evidence shows infrastructure and manufacturing are better financed through bond markets and institutional investors.
2. Deepening Capital Markets and Corporate bond market expansion: Currently shallow and skewed toward AAA issuers, unlike the US or South Korea.

1. 1. Institutional participation: Pension and insurance funds need credit enhancement mechanisms, such as those provided by NaBFID, to enter riskier construction phases.
   2. Regulatory predictability: Stable taxation and contract enforcement reduce risk premiums, improving capital allocation. This shift reduces systemic risk and complements domestic savings mobilisation.

Improving Capital Efficiency: Doing More with Less

ICOR as a Policy Lens: Lowering ICOR from ~4.5 to ~4 could significantly ease financing pressure. This requires:

1. Execution reforms: Faster approvals, dispute resolution (as stressed by Justice D.Y. Chandrachud in infrastructure arbitration cases).
2. Logistics and DPI: PM Gati Shakti and Digital Public Infrastructure reduce transaction costs, raising returns on investment.
3. Green efficiency: Integrating sustainability through initiatives like the Green Credit Programme, aligning growth with climate commitments. Capital efficiency ensures growth is non-inflationary and fiscally prudent.

Leveraging Startups: Bending the Capital–Output Curve

1. Startups as Quality Multipliers: Startups, particularly in deep tech (semiconductors, space, AI, clean energy), generate high value-added output with lower capital intensity. India’s position as the world’s third-largest startup ecosystem illustrates this potential.
2. Macro-Economic Payoffs

• Productivity spillovers across logistics, healthcare, and manufacturing.
• Wealth democratisation, expanding the savings base beyond traditional industrial elites.
• Innovation-led growth, consistent with endogenous growth theory (Romer).

A Virtuous Cycle of Reform

Mutually Reinforcing Pillars

1. Higher domestic savings feed market-based financing.
2. Efficient capital markets channel funds to startups and infrastructure.
3. Startups and DPI enhance capital efficiency economy-wide.

4. Together, they create a self-reinforcing growth ecosystem.

Conclusion

Echoing Justice Radhakrishnan’s vision of economic democracy and President Droupadi Murmu’s call for inclusive growth, India’s shift to quality finance is essential for a resilient, innovative Viksit Bharat by 2047.