This appeared in the Economic Times on 12 October 2026 (link). Published: Oct 11, 2026, 11:45:14 PM IST
We have entered a golden age of Indian entrepreneurship. The number of active companies has risen by more than half a million in three years, rising by a third, from 1.6 million to 2.2 million.
Many of these are new companies, encouraged by the new opportunities in a fast-growing, rapidly changing economy. At the same time, several are likely previously informal businesses registering formally as companies. For decades, surveys showed that the barriers to formalization were mainly a high regulatory burden (high costs of formalization), particularly for smaller firms, and limited gains from formalization as cost and availability of capital were challenges. This is clearly changing.
Irrespective of whether these are new businesses or existing businesses registering themselves, the underlying drivers are only two: easing regulations and falling cost of capital. We still need to do much more on both fronts, and it would be unwise to assume these changes come without costs.
While meaningful risks from potentially excessive de-regulation may be some time away, some side-effects of the falling cost of capital are already visible and need to be dealt with quickly.
Underlying the remarkable reduction in India’s cost of capital is the government’s progress in fiscal consolidation. India is among the rare major economies where general government fiscal deficit is near pre-Covid levels. Once adjusted for the off-budget spending in that era, the actual deficit is much lower today.
This comes at a cost. A shrinking deficit hurts growth. India’s output is still a year behind the pre-pandemic path: better than for most other economies but implying slack in the job market. The equivalent of one year’s new workers does not have work. Even as the current rapid economic growth creates jobs, the larger-than-earlier pool of under- and un-employed workers means real wage growth is weak for a large part of the workforce, and they do not ‘feel’ the growth via a better standard of living. This has political implications.
The wise, if unstated policy choice has been to let the private sector fill the economic slack, using cheaper capital to build businesses and create jobs. The surge in company creation and capital formation suggests this is underway. The cost and availability of both debt and equity capital are currently among the lowest we have ever seen.
Despite global disruptions, and in particular the surge in energy prices, home loan rates are still near 7%. Increasingly sophisticated financial firms, leveraging our digital public infrastructure, are also making credit available to a wider swathe of smaller businesses.
For equity capital, while the high price-to-earnings ratio is and should be a concern for investors, it signals low cost-of-equity for entrepreneurs. They are acting on this signal: stock sales by companies and promoters could be nearly 6 trillion rupees this year.
While private equity firms booking gains and repatriating seems to be a loss to the economy, these profitable exits encourage them to raise new funds to invest in a new batch of startups and young companies. The proliferation of foreign and increasingly local venture capital and private equity firms also means that more entrepreneurs have access to equity capital.
Exciting as these trends are, some negative side effects are showing up. To understand better, it helps to take a mechanistic view of capital flow, comparing it to water. Water flows in the direction of the gradient, with the pace set by the slope. If Indian bond yields are 8% and US bond yields (which set the proxy for global cost of capital) are 2%, water flows rapidly into India, chasing higher returns. However, if Indian bond yields fall to 7.3% when US yields are 5.3%, the flow of capital slows, and in some pockets, reverses.
At a time when India needs more capital to accelerate growth, can there be a risk that Indian savings start getting channeled to firms outside India? This risk is limited: India does not have an open capital account (not all pipes have free bi-directional flows). Indian financial firms, for example, cannot lend to foreign borrowers. However, as it is important to allow investors to freely take out what they brought in (otherwise they would hesitate to come in), unchecked capital outflows are also permitted in some segments.
This has meant that India, which at one point sought to maintain a current account deficit (CAD) between two to three percent of GDP (CAD is the difference between consumption and production; seen another way, as the gap between savings and investments), is now struggling to finance a much smaller CAD.
Given entrenched fiscal challenges, global rates are unlikely to fall unless there is a sharp growth slowdown. So should Indian interest rates be raised? The lazy narrative in bond and currency markets is that they should mirror global rates. Some investors also question fiscal prudence when there is slack in the economy, in effect asserting that fiscal works better than monetary.
Prudence instead would be in acting on two fronts.
The first is to open so-far-blocked/impeded channels of capital inflows (like with the recent relaxation for bond investors) and make foreign capital more welcome and prospects more attractive. Simplification of tax laws, a direct approach to global firms that drive value-chains, and a relentless easing of regulations can help. Deregulation would also help domestic firms.
Secondly, we need to raise demand for capital – the welcome surge in new issuances, including by the government, is important to absorb the massive inflows into public markets without creating valuation distortions. This capital can then be deployed for growth. We may also need to take more policy risks to channel capital from pension and insurance funds to be deployed more actively for growth.