India’s Financial Needs for Growth by 2047

Source: The post India’s Financial Needs for Growth by 2047 has been created, based on the article “Financing India’s future growth is a challenge that must be met” published in “Live mint” on 10th January 2025

UPSC Syllabus Topic: GS Paper3- Economy- mobilisation of resources

Context: The article discusses India’s need for financial capital to sustain economic growth and achieve development by 2047. It highlights the importance of increasing private investments, foreign capital, and expanding the corporate bond market. It also emphasizes improving investment norms for insurance and pension funds.

For detailed information on Boosting India’s Economy through Innovation and Reform read this article here

What Financial Goals Does India Have for 2047?

1. India aims to become a developed country by 2047, needing a growth rate of 7%-7.5% per year.
   2. The National Infrastructure Pipeline requires an investment of $1.3 trillion, and the energy sector needs $250 billion annually until 2047.
2. The MSME sector requires $1.5 trillion for scaling up and digital transformation.
3. The chief economic advisor estimates that India’s gross fixed capital formation needs to go up from the cur- rent 28% of GDP to at least 35% on a sustained basis.

What is the current status of India’s financial capital?

1. Public Capital Expenditure: Increased from 3.6% of GDP in 2019-20 to 5.6% in 2023-24, mostly focused on infrastructure development.
2. Private Investments: Indian corporates have reduced their debt-equity ratio from 1.2% to 0.9%, showing financial readiness. Equity fundraising through IPOs, QIPs, and rights issues crossed ₹3 trillion in 2024, a 64% rise from ₹1.88 trillion in 2021.
3. Domestic Savings: Declined from pre-pandemic levels of 20% of GDP to 18%, with more investments going into physical assets.
4. Foreign Investments: FDI remains stagnant at $70-85 billion annually, while private equity and venture capital contribute around $50-55 billion annually.
5. Corporate Bond Market: Underdeveloped, representing only 16% of GDP, compared to the global average of 40%.

How can India secure the financial capital needed for growth by 2047?

Increase Private Investments: Encourage public-private partnerships (PPPs), divestments, and manufacturing incentives. Indian companies are well-positioned, with strong balance sheets and a 64% rise in equity fundraising in 2024.

Attract Foreign Capital: Boost FDI (currently stagnant at $70-85 billion) by improving ease of doing business, contract enforcement, and tariff clarity. Strengthen private equity (PE) and venture capital (VC) inflows.

Expand the Corporate Bond Market: Deepen the market, which is currently 16% of GDP, compared to the global average of 40%. Provide quality bonds and attract diverse investors for infrastructure and manufacturing funding.

Reform Insurance and Pension Funds:

• Greater participation by insurance and pension funds can strengthen India’s bond market.
• In the U.S., pension funds typically allocate 40-50% of their corpus to equities, 20-30% to bonds, and 10-15% to private equity (PE), with the rest in venture capital (VC) and real estate.
• In contrast, Indian life insurance funds must invest 50% of their corpus in government securities, while under the National Pension System (NPS), people above 55 years must allocate 75% to government securities. Relaxing these norms in India can allow funds to invest more in corporate bonds, equities, and alternative assets, improving returns for investors and mobilizing greater capital for the economy.

Question for practice:

Evaluate how India can secure the financial capital needed to achieve its growth and development goals by 2047.