India faces an unusual dilemma: it has money in abundance, yet too little of it is put to productive use. Currency with the public has surged, bank deposits are at record highs, and household savings remain among the largest in the developing world. Yet this liquidity seldom fuels investments that expand capacity or create jobs. According to the Reserve Bank of India, household savings continue to rise, with deposits and small savings schemes attracting record inflows. India’s gross savings rate — around 30% of GDP — is comparable to the high-growth phases of East Asian economies. Currency with the public has more than doubled in recent years, from ₹31,000 crore to ₹91,000 crore.
India saves much and invests little. The country’s investment rate has stagnated, especially in sectors critical for employment and productivity growth. Savings often flow into unproductive assets like gold and real estate, or into speculative stock market rallies. Without converting savings into productive capital, India’s growth story risks losing momentum.
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Other Asian economies offer useful lessons. In South Korea and China, governments channelled household savings into manufacturing and infrastructure through development banks and pension reforms. Vietnam used tax incentives and sovereign guarantees to deepen corporate bond markets within a decade. India, despite a comparable savings rate, lacks such institutional mechanisms. A focused policy to convert savings into long-term capital — as East Asia did during its take-off phase — is critical if India wants to sustain high growth and meet its development ambitions.
Cultural and structural constraints
The roots of the imbalance lie deep in India’s financial behaviour. Households are traditionally risk-averse, preferring tangible assets such as gold, land, and fixed deposits over equities or corporate bonds. The new generation of savers, shaped by the weak performance of equity markets in recent years, has largely followed this conservative approach. The surge in metal and property prices has reinforced the belief that safety trumps returns.
Another missing link lies in financial access. A large share of household savings comes from rural and semi-urban India, where investment choices are limited to bank deposits, chit funds, or gold. Even when formal products exist, poor financial literacy and high transaction costs deter participation. India’s digital public infrastructure — UPI, Aadhaar, and the Account Aggregator framework — has made payments frictionless, but investment access has lagged behind. Expanding low-cost digital gateways for mutual funds, bonds, and infrastructure instruments can democratise wealth creation and redirect savings into productive avenues.
A distorted capital ecosystem
This preference has warped India’s capital structure. Banks remain the main channel of credit allocation, but their lending is constrained by prudential norms and limited risk appetite. Small enterprises, start-ups, and infrastructure projects — precisely the sectors that need long-term finance — are the worst affected. Non-bank financial markets remain shallow: corporate bonds amount to only 17% of GDP, compared with over 100% in South Korea. Such overdependence on banks stifles innovation and financial deepening.
A parallel distortion arises from the government’s own appetite for funds. High fiscal deficits mean the Centre and states borrow heavily from the same pool of household savings that might otherwise finance private investment. When public borrowing dominates, banks and financial institutions prefer the safety of government securities over riskier corporate lending. The crowding-out effect has become structural — squeezing credit for small businesses, infrastructure developers, and manufacturing projects that could generate jobs and growth. Unless fiscal consolidation progresses in tandem with financial deepening, private capital formation will remain constrained.
Retail investors have largely ignored instruments such as real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). These vehicles can pool funds from individuals and institutions to finance income-generating assets, yet their uptake remains low. The barriers are well known—regulatory friction, high entry thresholds, low liquidity, and limited investor education.
A recent IBEF report notes that supportive policies — especially tax breaks proposed in recent Budgets — could make these instruments more attractive. By easing participation norms and improving transparency, the government can help channel household wealth into the very sectors that drive growth.
The missing long-term capital
Institutional investors such as pension and insurance funds, which should ideally supply patient capital, are bound by conservative investment rules. As a result, long-term savings get trapped in short-term instruments. Policy reform must therefore shift from merely encouraging savings to ensuring their productive deployment.
Deepening securitised markets — such as infrastructure and green bonds — can help direct household funds into nation-building sectors. Retail participation can be widened through digital platforms, simplified disclosures, and government-backed credit enhancements. If investing in a regulated India Infrastructure Bond were as easy as buying a mutual fund, savings would naturally gravitate towards productive uses.
De-risking investment
To attract institutional and foreign capital, India must create credible de-risking mechanisms. Partial credit guarantees, blended finance models, and sovereign-backed insurance for infrastructure and climate projects can lower perceived risks. The aim is not to eliminate risk but to reduce uncertainty—an essential condition for unlocking private participation in long-term assets.
Monetary policy, too, shapes the savings-investment dynamic. High real interest rates encourage households to hold deposits instead of investing in equities or bonds, while low rates risk fuelling asset bubbles. The Reserve Bank’s cautious stance has kept inflation in check but also slowed credit expansion. Aligning monetary policy with the government’s investment priorities — through instruments like targeted long-term refinancing or green bond support — can help bridge the gap between liquidity and productive deployment without compromising stability.
Rethinking tax incentives
Tax policy can be a powerful lever. Current incentives often favour consumption or short-term speculation. A redesigned regime could reward long-term holdings in equity and bonds, or provide deductions for investments in infrastructure-linked securities. Just as the National Pension System nurtured retirement-linked savings, similar frameworks could be built for nation-building investments.
Financial reform must also address trust and behaviour. Public sector enterprises or government agencies could issue bonds tied to specific outcomes — such as renewable energy capacity or logistics corridors — creating tangible links between individual investment and national development. People are more likely to invest when they see their money funding measurable progress.
India’s economic destiny will depend not on how much it saves, but how intelligently it invests. Liquidity is abundant; what’s missing is a policy architecture to channel it into productive sectors. The conversion of idle savings into productive capital—through deeper markets, fair incentives, and a shift in mindset—is the next great reform India must undertake if it is to become a developed nation.