Is India's finance boom outrunning its real economy?

Akshara (0:04)

In today's episode, we'll do one deep dive and cover another story for the day. First, we'll talk about whether India's finance boom is outrunning its real economy, and then we'll talk about whether you can put a score on a hospital. Welcome back to The Daily Brief by Zerodha, where we cut through the noise to help you understand what's actually happening in the most important stories from business and markets. I'm your host Akshara, and today is Monday, 5th October. Coming to the first story. So India stands 146th in the world when ranked by per capita productive output. But when ranked by stock market capitalisation relative to GDP, we jump to the 14th, which isn't too far from the company of the US and the UK. This chasm is the heart of a report on India's macroeconomy by the Azeem Premji University Centre for the Study of Indian Economy. Written by Puneet Basin and Anshuman Singh, the analysis agrees on the well-known facts about India's headline numbers. Real GDP growth has hovered around 7-8%, inflation is subdued, corporate balance sheets are the cleanest they've been in a decade, and the banking system has more capital than it knows what to do with. But the report pulls at the seams of these findings and finds three structural vulnerabilities that the headline numbers are papering over.

Now, the report is divided into three sections, each of which provide a lens into the Indian economy that eventually combines a cohesive picture. We recommend reading the report in its entirety. But if you're strapped for time, we try to make a succinct attempt at understanding it all as a whole. Quick note, earlier we covered another report by the same institution on Indian unemployment. We recommend watching our subtext episode with the authors of that episode, Rosa Abraham and Tamagna Haldir.

Now, the first section of the macroeconomy report is about India's lack of capex, which we covered sometime last year, and what it says about demand. So, to understand that, a little history is instructive. In the mid 2010s, India went through a twin balance sheet crisis, where companies that had overborrowed primarily for power and infrastructure projects began to go bust. Those that barely survived had loads of leverage that they now had to clear. So, companies began cleaning their books aggressively. The share of firms whose operating earnings couldn't cover their debt service payments fell from a peak of approximately 19% in 2016 to approximately 10.5% in 2025 And net bad loans at commercial banks hit historic lows. Eventually, balance sheets became clean, banks ended up with surplus capital, and borrowing costs for large industrial firms began trending down. Now, by any textbook, this is the perfect launchpad for the next private investment boom.

But the authors make a key distinction in how corporate India moved out of the crisis. It didn't grow its way out, but it shrugged. The financial footprint of India's non-financial corporations in FY 2023-24 is substantially smaller than it was a decade earlier. Company did shed debt, but only by shedding assets. They did not invest in new capacity. Now, this is not necessarily a bad thing, but the hangover of this crisis, the authors say, explains the stubborn investment gap we see in India today.

So, India's grossed fixed capital formation, or GFCF, has held steady post-pandemic at an average of around 30% of GDP. Compare that to the acceleration India saw in the mid-2000s when it peaked at 35.8%.

Net borrowing by corporations, which is a rough proxy for fixed investment spending, averaged approximately 6% of GDP before the crisis. But now, it hovers around 4%.

So, what's holding firms back? A few weeks ago on Subtext, he called investment manager Arvind Chari to talk about the Indian macroeconomy, and his answer was the same as that of his report. Demand Businesses will only build new factories when they expect customers to show up. But right now, all engines of aggregate demand are muted. Let's start with consumers. Real wage growth has remained stagnant for years. Household consumption looks resilient in the aggregate, but much of it is being propped up by debt rather than rising incomes. We'll return to this pattern shortly. Now, another potential engine is exports. India's exports have averaged 21.8% of GDP since COVID. That is lower than the 24.4% average between 2010 to 2014, when the world was recovering from the global financial crisis. And lastly, there's the government. The one component of demand most directly under policy control has also been pulling back. The central government's primary deficit has crashed from 5.7% of GDP in FY21 to 0.8% in FY26.

This consolidation came almost entirely from cutting revenue expenditure on wages, subsidies, and grants. Capital outlay has also only risen modestly, and not enough to compensate for the broader withdrawal. And the bank data confirms what the macro data suggests. Credit depth in the industrial sector has been declining consistently.