Why India needs smarter finance: It’s not just about enlarging the country’s financial sector

Subscribe to enjoy similar stories. India’s budget for 2026-27 signals a growing recognition that its financial challenge is no longer one of scale alone, but of structure and effectiveness. Measures such as the introduction of a market-making framework for corporate bonds, the development of total return swaps and bond-index derivatives, incentives for large municipal bond issuances and the creation of mechanisms such as the Infrastructure Risk Guarantee Fund and real estate investment trusts (REITs) linked to central public sector enterprises (CPSEs) point to an attempt to deepen long-term, market-based finance and improve risk distribution beyond banks.

These initiatives reflect an emerging policy shift away from volume-driven credit expansion towards improving market infrastructure, liquidity and institutional participation. India’s economic story is often told through large reassuring numbers: trillion-dollar GDP milestones, record tax collections, booming equity markets and the distinction of being the world’s fastest-growing large economy. Yet, these headlines mask a less comfortable reality.

For large parts of the economy, finance still does not work as it should. Recent debates on credit growth, capital markets, housing finance and regulation raise a major question: Does India need a larger financial system or a more effective one? At first glance, Indian data on corporate indebtedness seems to argue for scale. India’s non-financial corporate credit-to-GDP ratio remains around 55–60%, far below China’s nearly 180% and well below most advanced economies.

This gap is often interpreted as evidence of financial underdevelopment. However, depth is not simply about the quantity of credit. What ultimately matters is