Unlocking 8% GDP growth: Why India must embrace global debt capital markets

India’s ambition to achieve a sustained real GDP growth rate of 8 per cent is not simply a numerical aspiration — it is an economic and social imperative. This pace of expansion represents the minimum threshold required to create adequate employment for a youthful population and to lay the foundations of a modern, prosperous economy. For decades, the prevailing orthodoxy has assumed that such growth must be funded predominantly through domestic savings. The guiding principle has been that higher investment is possible only if households and firms save more. Yet this assumption, once tenable, has become increasingly inadequate.

 

The narrative around India’s capital sufficiency has historically revolved around the equity market. Liberalisation measures and the opening up of equity flows have attracted substantial foreign investment, underlining India’s attractiveness as an investment destination. The influx of foreign equity capital has been celebrated as a sign of global confidence in India’s long-term growth prospects. But this success has also obscured a fundamental weakness: the underdeveloped and unreformed nature of India’s debt capital markets. While companies can raise equity abroad with relative ease, their ability to tap debt remains largely constrained to a shallow, expensive domestic market. This imbalance poses a serious obstacle to sustained high growth.

 

 

The arithmetic of growth is uncompromising. Domestic savings alone are insufficient to finance the scale of investment needed for 8 per cent growth. To bridge this gap, India must embrace international debt capital markets and rethink its long-standing apprehensions about foreign borrowing. The real question is no longer whether India can afford to rely on foreign capital, but whether it can afford not to.

 

The Arithmetic of a Slowdown 

The challenge is best understood by examining two critical macroeconomic variables: the domestic savings rate and the Incremental Capital-Output Ratio (ICOR). The ICOR measures how much investment is required to generate one unit of additional output. A higher ICOR reflects declining efficiency of capital, meaning more resources are needed to produce growth.

 

Official data from the Reserve Bank of India indicate that India’s gross domestic savings rate has been hovering around 30–31 per cent of GDP. Household savings, traditionally the bedrock of India’s capital formation, have fallen sharply. While some may rightly question the methodology behind these figures, the broad trend is corroborated by multiple indicators from the financial system and points towards a weakening domestic savings engine.

 

 

Meanwhile, the ICOR has deteriorated over time. Long-term estimates place it between 4 and 5, with 4.5 widely cited as a reasonable average. This figure is more than a technicality; it reflects the frictions, delays and inefficiencies that make investment less productive in practice.

 

When these two numbers — savings and ICOR — are placed into the growth equation, the outcome is sobering. Even under the most optimistic scenario, with an ICOR of 4.5, India would need a savings and investment rate of around 36 per cent of GDP to sustain 8 per cent growth. This is significantly higher than current levels. If capital efficiency were to worsen further, the required rate would climb even higher, pushing the target well beyond reach. The implication is unavoidable: domestic savings alone cannot finance the scale of investment necessary to meet India’s growth aspirations.

 

Rethinking the Current Account Deficit 

Macroeconomic identities provide a useful lens to frame the challenge. A country’s savings minus its investment equals its current account balance (S − I = CAD). If a nation invests more than it saves, it must run a current account deficit (CAD), financed by capital inflows from abroad.

 

For decades, Indian policymakers have treated a large CAD as an existential risk. Memories of the 1991 balance-of-payments crisis shaped a defensive policy stance that prioritised keeping the deficit under control. This effectively meant suppressing investment to match the relatively low level of domestic savings. In practice, this self-imposed constraint capped India’s growth rate. Avoiding a CAD became synonymous with avoiding growth.

 

Today, however, India’s economic resilience provides far greater room for manoeuvre. The country holds substantial foreign exchange reserves, its external sector is diversified, and its financial system is more robust than in the past. For a capital-scarce economy with enormous investment requirements, running a CAD is neither reckless nor destabilising; it is the logical outcome of a high-growth strategy.

 

The real policy challenge is not whether to tolerate a CAD but how to finance it sustainably. This requires stable inflows of foreign debt capital directed towards productive, growth-enabling assets. In other words, if India wants to grow at 8 per cent, it must willingly run a large current account deficit, supported by inflows of global debt.

 

The Firm’s Dilemma: Why Good Projects Go Unfunded 

At the microeconomic level, the consequences of constrained debt markets are stark. When a corporate board evaluates a project, it calculates the net present value (NPV) of expected returns, discounted by the firm’s weighted average cost of capital (WACC). If the projected return falls below this hurdle rate, the project is abandoned.

 

In India, the WACC is artificially inflated because debt capital is scarce and costly. This dynamic prevents otherwise viable projects from proceeding. More subtly, it shapes the type of projects that do get funded. Firms favour investments with shorter payback periods, such as those in services or light manufacturing. By contrast, capital-intensive projects in heavy industry or infrastructure — critical for building long-term economic resilience — are systematically disadvantaged.

 

Government borrowing practices aggravate the problem. More than 98 per cent of central and state borrowing is financed through domestic savings. By mandating that banks, insurance firms and pension funds hold a fixed share of their assets in government bonds, policymakers create a captive market for public debt. While this enables the state to borrow at artificially low interest rates, it functions as a hidden tax on the financial system.

 

The unintended consequence is that the private sector is left with a residual and limited pool of debt capital. Competition for these scarce resources drives up interest rates, further raising the hurdle rate for private investment. Effectively, the cost of financing government deficits is shifted onto the balance sheets of private firms, choking off investment and jobs.

 

The Solution: Opening the Door to Global Debt 

If India’s domestic debt pool is both inadequate and expensive, the solution must lie in tapping external sources. To reach and sustain 8 per cent growth, Indian firms must gain substantially greater access to global debt capital. Incremental changes will not suffice. What is required is a quantum leap: a three- to six-fold increase in foreign debt inflows.

 

Two reforms are essential. First, restrictions on foreign participation in the domestic rupee-denominated corporate bond market must be removed. Second, the External Commercial Borrowing (ECB) framework needs pragmatic liberalisation. Together, these measures would expand the supply of debt capital available to Indian firms and sharply reduce their WACC.

 

The benefits of such a shift would be transformative. A greater supply of low-cost debt would make a wider range of projects viable. Improved leverage would enhance firms’ return on equity (ROE), creating stronger incentives to invest. At the macroeconomic level, foreign debt inflows would directly finance the current account deficit required by a high-investment strategy. Risks will inevitably accompany this transition, but these can be managed with prudent regulatory frameworks and sound macroeconomic policies.

 

A Call for a Twenty-First-Century Capital Account 

India’s ambition for 8 per cent growth cannot be achieved by relying on twentieth-century financial frameworks. A larger role for global debt capital offers a rare dual solution: at the macro level, it finances the inevitable current account deficit of a high-investment economy; at the micro level, it reduces the cost of capital and revitalises private investment.

 

The regulatory defensiveness of the 1990s, born of crisis, is now a limitation that constrains potential. What India requires is a twenty-first-century capital account regime: a modern code governing foreign participation in rupee-denominated corporate bonds and the ECB market. This code must replace prescriptive restrictions with principle-based rules, minimise bureaucratic approvals, and provide firms the flexibility to manage currency risks effectively.

 

Such a framework would reflect the confidence of a nation with a strong balance sheet, a resilient financial system and an insatiable appetite for growth. The choice before India is stark: remain bound by outdated fears and accept slower growth, or embrace global debt capital and unlock the path to 8 per cent growth.

 

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The authors are management consultant and researchers based in Mumbai

 

Disclaimer: These are personal views of the writers. They do not necessarily reflect the opinion of www.business-standard.com or Business Standard newspaper.