High cost of capital constraining pvt investment, growth: Eco Survey

For India to finance sustained growth, it must strengthen long-term capital markets as bond market currently is shallow, illiquid

India’s high cost of capital due to relatively shallow corporate bond markets, limited institutional investor depth, sovereign risk premia, and regulatory restrictions on capital flows, is a constraint on private investment and long-run growth, the Economic Survey, authored by Chief Economic Adviser (CEA) V Anantha Nageswaran, said. The Survey also emphasised that a well-developed corporate bond market is indispensable to India's financial system and its path toward becoming a Viksit Bharat by 2047, as a vibrant bond market helps lower borrowing costs through competitive pricing and improved liquidity.

 

Over the past three decades, between 1995 and 2025, India’s weighted average long-term interest rates averaged 7.61 per cent, far above the average long-term rates seen in Canada (3.13 per cent), Italy (2.94 per cent), and Switzerland (1.04 per cent).

 

“A well-functioning debt market would reduce capital costs, mobilise savings efficiently, and offer households reliable income-generating products. India's households have embraced equities; extending that confidence to debt markets is the next frontier for building truly resilient portfolios and a mature financial system,” the Survey pointed out, adding that institutional investors, influenced by return profiles, risk assessments, regulatory incentives, and prevailing market liquidity conditions, favour equities and government securities (G-Secs) over corporate bond results, which is constraining the corporate bond market's growth and development.

 

The Survey highlighted that for India to finance sustained growth, it must strengthen long-term capital markets. Currently, India’s corporate bond market is shallow and illiquid, dominated by top-rated issuers. Additionally, securitisation is limited, municipal bonds are underdeveloped, and pension and insurance funds remain conservative investors due to regulatory and cultural inertia.

 

“India’s corporate bond market remains underdeveloped, accounting for around 16-17 per cent of gross domestic product (GDP), compared with the equity market capitalisation of over 130 per cent of GDP. This is substantially lower than in major peer economies, such as the US and China, where corporate bond markets constitute approximately 40 per cent and 36 per cent of GDP, as of 2024, respectively,” the Survey highlighted.

 

The Survey said to deepen the bond market in the country, India needs to rationalise tax treatment of debt instruments, create credit enhancement facilities for lower-rated issuers, standardise securitisation structures and disclosures, and build municipal financial capacity and pooled bond mechanisms.

 

Additionally, a revision of investment guidelines for long-term funds, and strengthening of financial market infrastructure and insolvency systems are also required.

 

It also pointed out that to develop a deep debt capital market requires market participants — issuers, investors, arrangers, and rating agencies — to act as market-builders.

 

“Key imperatives include enhancing transparency, pricing risk honestly beyond the siloes of AAA-rated bonds, and ensuring financial innovation remains standardised. Mechanisms such as partial guarantees and blended finance can help mid-tier companies access bond markets, unlocking capital for this segment and driving India's future growth,” the Survey emphasised, adding that a shift from passive buy-and-hold strategies to active trading is essential for building secondary market liquidity.

 

Data shows India’s corporate bond market, although shallow, has demonstrated impressive growth, with outstanding issuances increasing from ₹17.5 trillion in 2014-15 (FY15) to ₹53.6 trillion in FY25, growing with an annual rate of approximately 12 per cent. In FY25, the highest ever fresh issuances were recorded, totalling ₹9.9 trillion.

 

Additionally, in FY26, the debt market accounted for over 63 per cent of total resource mobilisation from the primary market in April-December 2025.

 

As of December 31, 2025, the market comprised 6,351 issuers having a total of 29,638 instruments outstanding, with banks, insurance companies, pension funds, mutual funds, and non-banking financial companies (NBFCs) as the principal investor base.

 

Furthermore, the bond market is dominated by private placements, and public offerings remain limited, deterring access for small firms. “The secondary market remains shallow, with India's annual bond turnover ratio in secondary markets at 0.3, lower than that of Indonesia (1.17) and China (1.16),” the Survey said.

 

Additionally, the Survey highlighted that reducing India’s cost of capital requires attention not only to financial intermediation but also to the drivers of production, exports, and surplus generation.

 

“The durable route to a lower cost of capital is, therefore, inseparable from a growth pattern anchored in higher productivity, enhanced manufacturing competitiveness, sustained export growth, and the gradual transition from structural savings deficit to structural savings strength. Financial deepening can support and accelerate this transition, but it cannot be a substitute for it,” the Survey said.