India’s Financial Future: Building a Modern Vision

India’s financial system stands at a crossroads — one foot grounded in centuries-old innovation, the other on a stepping stone toward a high-income future. 

The nation’s goal of becoming a high-income economy by 2047 depends on how effectively it can balance these two worlds: drawing on its deep historical roots while embracing the reforms and modernisation necessary for sustainable, inclusive growth.

India’s financial assets have grown to nearly 190% of GDP, reflecting an expanding and diversifying financial ecosystem. 

Non-bank financial institutions (NBFIs) and capital markets now provide nearly half of private sector credit, signalling a shift away from the traditional dominance of state-owned banks.

Yet this transformation brings both promise and risk. For instance, regarding NBFIs, they provide a wide range of financial services similar to banks, but do not hold a full banking license and cannot accept traditional demand deposits (like savings or checking accounts).

The growing role of markets and NBFIs has deepened access to capital but also increased systemic vulnerabilities — from governance gaps and liquidity mismatches to fragmented oversight. 

To reach its goal of raising the investment-to-GDP ratio from around 33.5% to 40%, India will need to unlock private investment at scale — a task that demands far-reaching reforms.

Reforms for a Modern, Resilient Financial System

The World Bank identifies four key reform areas critical for India’s transition: deepening the fixed-income market, enhancing MSME finance, climate finance, and reforming state-owned financial institutions. 

1. Deepening the Fixed-Income Market

India’s fixed-income market — which includes bonds and other instruments that provide investors with regular, predictable returns — remains relatively underdeveloped compared to the country’s vibrant stock market and extensive banking sector. 

While banks and equity markets dominate India’s financial landscape, the bond market plays a much smaller role in providing funds to businesses and infrastructure projects. 

As a result, most companies still rely heavily on bank loans for financing, and the government bears a significant portion of the responsibility for funding long-term development, including highways, energy projects, housing, and urban infrastructure. 

Deepening the fixed-income market means expanding and diversifying it, making it easier for more investors and institutions to participate.

One key reform would be to allow pension funds and insurance companies—both of which manage vast pools of long-term savings—to invest more freely in corporate and infrastructure bonds rather than keeping most of their assets in low-risk government securities. 

By doing so, India could unlock significant domestic capital that is well-suited for financing long-term projects, thereby improving liquidity and efficiency in the bond market.

2. Expanding MSME Access to Finance

Micro, small, and medium enterprises (MSMEs) are businesses classified based on their investment in plant, machinery, or equipment. They form the backbone of India’s economy, contributing nearly 30% of the country’s GDP and employing millions across both urban and rural areas. 

Despite their critical role in driving innovation, exports, and job creation, these enterprises continue to face a severe shortage of financing — a gap estimated at around 11% of India’s GDP. 

This means that a large number of small and medium businesses struggle to obtain the loans or credit they need to expand operations, invest in technology, or even maintain consistent cash flow. 

Many MSMEs lack the collateral, credit history, or formal documentation that traditional banks typically require, leaving them dependent on informal or high-cost lending sources. 

Expanding access to finance for MSMEs would have a transformative impact on India’s economic landscape, empowering small businesses to grow, stimulating entrepreneurship, and creating millions of new jobs, particularly in the manufacturing and services sectors. 

Moreover, improved access to affordable credit would enhance productivity by allowing enterprises to modernise equipment, adopt digital tools, and participate more fully in supply chains. 

3. Mobilising Climate and Green Finance

Mobilising climate and green finance is becoming one of the most urgent priorities for India as it pursues sustainable growth while addressing the immense challenges of climate change. 

The country’s transition to a low-carbon economy—encompassing renewable energy, clean transportation, resilient agriculture, and sustainable urban development—will require an estimated $250 billion in investment annually until 2047. 

Currently, much of this funding comes from public sources or international climate funds, which are not sufficient to meet the scale of India’s ambitions. 

Mobilising green finance means attracting far greater participation from private investors, banks, and global capital markets to fund projects that have positive environmental impacts. 

This includes expanding the use of instruments such as green bonds, blended finance structures, and sustainability-linked loans that tie borrowing costs to measurable environmental outcomes. 

However, many domestic banks and financial institutions lack the capacity to accurately assess and manage climate-related risks, while the absence of a well-defined national taxonomy for green investments makes it difficult to ensure that funds are truly financing sustainable projects. 

If implemented effectively, mobilising climate and green finance could help India balance economic growth with environmental stewardship—reducing emissions, protecting natural resources, and building resilience against future climate shocks, all while opening vast new opportunities for innovation and green jobs.

4. Reforming State-Owned Financial Institutions (SOFIs)

State-owned financial institutions (SOFIs) continue to play a dominant role in India’s financial system, controlling roughly 57% of total financial assets and serving as a crucial source of credit for rural areas, agriculture, and social sector programs. 

These institutions—primarily public sector banks and development finance entities—have long been instrumental in supporting government priorities such as financial inclusion, small business lending, and infrastructure development. 

However, their large market share also means that inefficiencies within these institutions can have wide-reaching consequences for the broader economy.

Many SOFIs face persistent challenges, including high levels of non-performing assets, limited operational flexibility, and governance structures that are often influenced by political or bureaucratic considerations rather than commercial efficiency. 

By improving governance, introducing greater accountability, and modernising management practices, SOFIs could become more agile and competitive. 

Reducing reliance on government recapitalisation, which cost over US$38 billion between FY2018 and FY2021, would ease fiscal pressure.

India’s financial story dates back millennia, rooted in trust, innovation, and community-based finance. Today, the same principles — transparency, adaptability, and inclusiveness — must guide its modernisation.

If the country can implement the difficult but necessary reforms — strengthening its bond markets, empowering MSMEs, mobilising green capital, and modernising state-owned institutions — India’s financial sector can become not just a facilitator of growth, but the foundation of its high-income future.