Capital Markets: The Missing Piece in India’s Growth Story
Insights on what India’s macroeconomic signals reveal about demand, investment, market concentration, and the policy challenges that lie beyond budget day
In this episode, journalist and author Puja Mehra speaks with economist Dr. Jahangir Aziz, Economist (Head Emerging Market Economics) at JPMorgan and a former finance ministry official, about what India’s upcoming Union Budget can realistically achieve amid slowing nominal growth and weak private investment. They discuss how the government’s commitment to fiscal consolidation shapes budget choices, even as tax revenues soften and demand remains constrained. Drawing on recent fiscal outcomes, inflation trends, capital market dynamics, and historical episodes such as the global financial crisis, Aziz explains why India’s investment slowdown is no longer cyclical but structural. He unpacks the widening disconnect between strong headline growth and persistently low core inflation, arguing that sustained disinflation signals excess capacity, weak pricing power, and a chronic shortfall of demand. The conversation examines why corporate investment has stagnated for over a decade, how rising industry concentration and limited sectoral churn are dampening incentives to invest, and the role underdeveloped corporate bond and private credit markets play in constraining medium-term financing for firms. Aziz also assesses the limits of budgetary action, the risks of an increasingly intrusive regulatory approach to capital markets, and the implications of slowing nominal GDP for earnings, debt dynamics, and fiscal space. The discussion concludes with reflections on why focusing narrowly on fiscal prudence and “Goldilocks” narratives risks overlooking deeper structural constraints to growth. Tune in for insights on what India’s macroeconomic signals reveal about demand, investment, market concentration, and the policy challenges that lie beyond budget day.
(00:00) Introduction
(00:27) Fiscal deficit and budget strategy
(02:57) Customs duties and tariff constraints
(05:10) Deregulation beyond the budget
(07:30) Capital markets and lack of reform
(11:52) Lessons from the 2008 crisis
(14:57) Corporate credit and market failures
(19:57) Nominal GDP growth concerns
(23:11) Explaining economic slack simply
(26:22) Investment slowdown and policy limits
(29:10) Structural causes of weak investment
(33:14) Industry concentration and ministries’ role
(34:40) Closing remarks
NOTE: This transcript is done by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on feedback@thecore.in.
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TRANSCRIPT
Puja Mehra: Dr. Jahangir Aziz, thank you so much for coming to this show.
Jahangir Aziz: Sure, sure.
Puja Mehra: You worked in the finance ministry, so you're in a position to tell us what might be going through the minds of the team that's preparing the budget right now.
Jahangir Aziz: Look, it is very hard to sort of second guess them. But by and large, I think the budget right now is going to target a lower deficit. So there are two paths to it.
One is whether or not they'll meet this year's budget deficit target, which most likely they will, despite the fact that nominal GDP was significantly lower than what they originally had forecasted. And then we had the GST rate cuts. But I think the loss in tax revenue most likely will be made up in probably greater share of contribution from either the RBI or the PSUs or a combination of the two.
There could also be a slowdown in the last quarter in terms of capital spending. But 4.4 looks that they will make 4.4 this year, which of course leads you to what happens next year. So this is a very conservative government.
This government has not used fiscal policy as a way of pushing demand up. It has been very restrained in that direction. And most likely it will continue to do what it has done over the past four or five years, which is target some degree of consolidation in the federal and in the central government budget.
We are expecting probably about 4.2. So if you have a 4.2 fiscal deficit or a lower deficit and there is very little sign that nominal GDP, despite whatever we talk about in terms of real GDP, nominal GDP, is going to go back to the 12%, 13% growth rates that we are accustomed to in the past, you don't really have very much space in terms of revenue being generated for spending in any major way. So my guess is that they're going to stick to, largely stick to, some degree of capital expenditure. They've already done this change in MNREGA where most of the, or a larger portion of the MNREGA expenditure now falls with the state.
So I don't really see very much in terms of big changes either in the tax regime, because we already had one, right? Or any shift in spending. What we are really looking for, or at least what I'm really looking for, is what does the Ministry of Finance do in the remaining 364 days?
Puja Mehra: I'm guessing they will be doing something about custom duties. What do you think?
Jahangir Aziz: So it is a tricky thing. If we are going to start slashing tariffs, I'm guessing that is your question, right? In response to the trade negotiations with the U.S., we are still part of the WTO. Because we are still part of the WTO, India simply cannot go and say it is going to cut tariffs only for the U.S. It has to be extended to all most favoured nations, which is practically all the trading partners. Therefore, I think that there might be some decline in tariffs, largely because there has been a significant increase in tariffs over the last 10-15 years. It's not just me, the previous chief economic advisors, all of them have talked about it.
Arvind Panagariya himself has talked about it. In the case that it wants to reduce tariffs on a specific country, it has to have a trade agreement. It can do it via trade agreement if it doesn't want to lower tariffs for everybody else.
And that is the tricky part. None of the trade deals that the U.S. has signed have been turned into trade agreements. Because the parliaments or legislatures of either the U.S. or the trading partner have actually endorsed it. So these are just trade deals. Trade deals do not really have the legal standing that a trade agreement has. So I think, yes, you are right that we could see some restructuring of the tariff regime.
But I don't think we should expect a very large change in that because of this problem. It's one thing to go and have a trade deal or trade agreement with the U.S. It's a completely different story if you're going to bring down import tariffs, let's say for wine, across the board. You really have to go back and start thinking about what it does to your domestic wine industry.
That's just my favourite example.
Puja Mehra: Right. So the other thing that came out of last year's budget was deregulation. We saw some follow-up on that through the year.
And you've said that you're going to be looking at what the finance ministry is going to do in the next 365 days. So what would you like to see, both for deregulation and when you said 365 days outside the budget?
Jahangir Aziz: Obviously, you want to ask for the moon. You're not going to get the moon. So what is within the purview of the Ministry of Finance?
Deregulation is actually the purview of other line ministries, not so much the Ministry of Finance. So the Ministry of Finance can basically push on deregulation in capital markets. Now, that is something they haven't done in a very, very long time.
We haven't seen any real reform or liberalisation in the capital markets. Instead, the sound bites that have come out of the regulators is more regulation. Sometimes in the guise of protecting the innocent consumers and individual investors.
But it is an increase in regulations that you see rather than a decline in recognition. What happens in the banking sector is RBI's purview. So that's not Ministry of Finance.
Obviously, Ministry of Finance has a very huge say in that because financial services is part of their responsibilities. What really sits with the Ministry of Finance is non-banking capital markets. And there, there is a lot that needs to be done and a lot that hasn't been done.
But I'm not holding my breath either in the case of capital markets. Just to give you an example. So if you think about India over the last 15 years, let's start from taper tantrums time onwards.
Since then, India's GDP has more than doubled. So imagine an economy where the level of GDP is more than doubling. You would imagine that in that doubling of the economy, a whole host of new sector leaders have emerged.
Now go back and look over the last 15, 20 years or even 25 years. Look at the top 10 sectoral leaders in any sector. Apart from one or two sectors, telecom recently.
You'll find whether you're looking at infrastructure, banking, whatever you want to look at. Pharmaceuticals, technology. The leadership has remained unchanged.
Within the top 10, people have moved from number 9 to number 7 or from 1 to 1.5. But the top 10 companies in any field has remained unchanged. The question that needs to be asked is how come an economy more than doubles its GDP without any change in the leadership of any sector. As I said, leave out telecom for the time being.
Pharmaceuticals, infrastructure, you just name it. There hasn't been any change. Auto industry, nothing.
On the other hand, you get to hear of a new startup every 20 minutes coming up in India. So there is enormous amount of private equity, venture capitalists or private equity firms which are willing to take bets on startups. Otherwise, these startups won't happen.
There is enormous number of IPO activity, even last year when the stock market didn't move at all. So there's a lot of money that is willing to initially fund a company and there's a lot of public money that's willing to buy those IPOs. But there is very little in between.
A startup has to get funding for 3 to 5 years outside of the risk capital that comes initially or the end where it's basically selling the company. Between that period of time, there's a 3 to 5 year period, where it requires significant amount of capital. Banks cannot do that.
Banks can't provide capital to an unnamed firm that is trying to do something that may or may not work. That's not the banking sector's problem. That's the capital market's problem.
That's where private credit comes into play. That's where corporate credit comes into play. And I'm not even talking about corporate credit in the 2030 infrastructure space.
I'm not even talking about that. In the 3 to 5 year space, there's hardly any corporate credit. There's hardly any private credit.
Now, that has to do with the structure of the capital markets. And that's where the government, particularly the Ministry of Finance, because it is the Ministry of Finance purview, it can make changes and make significant impact on financing growth or reducing the concentration that is happening in Indian industry. But I haven't heard either the Ministry of Finance in public discussions or through committees that they may form, etc., showing any real signs that that is the place where it wants to go. I mean, I can count at least 15, probably you can count about 20 committee reports that has been done over the last 30 years. But there hasn't been any real ownership of those recommendations by the Ministry of Finance. And it's not just this particular dispensation.
It hasn't been done in the past also. I'm not blaming this dispensation. Whereas most people in the capital markets will say that is a real need and that is where we have a structural issue that only the Ministry of Finance can solve.
Private sector can't solve that. Ministry of Finance can solve it. But as I said, I haven't heard anything in the past six months or nine months or a year of the government initiating any rethinking on the capital markets.
Instead, they have allowed their own regulators to actually make regulations more intrusive. And again, you know, the intentions may have been noble, but the impact is that it's essentially much more intrusive today than it was 10 years, 15 years ago.
Puja Mehra: Do you want to say in specific terms what the finance ministry should be doing? Just taking your example.
Jahangir Aziz: Let's go back to 2008, the global financial crisis. In 2008, there was an extreme entrenched belief, not just among the regulators, but particularly in the market, that India is a closed economy. Therefore, yeah, things can happen in the external fund, particularly on the financial front.
But, you know, India is immune to it, or mostly immune to it. So I don't remember the dates exactly. But on that Friday when we had the collapse in New York, on that Monday, you can go and check the actual price movement.
Puja Mehra: I think it was 10th September 2007, if I'm not wrong, something like that.
Jahangir Aziz: Something like that. And then we had the weekend, and on Monday morning, Indian interbank market opens up with a 10 percentage points gap up, which goes to about 14 percentage points by the end of the day.
Puja Mehra: I remember that.
Jahangir Aziz: And then there is another economy called Indonesia, next door, right, where almost like 45% of its bonds, forget about other instruments, bonds were held by foreigners, and they didn't move much. So one lesson that needs to be drawn from that is that, look, we are far more open in the capital market field despite our capital controls, which is mostly on individuals and mutual funds, etc., etc., etc. So that was the first realisation, I think, or the first shock, and we still haven't unravelled why that happened.
Puja Mehra: I still hear people saying we are decoupled.
Jahangir Aziz: But why? Every year, I would guess, 50 PhD students in economics and finance at Indian universities, forget about foreign universities. I haven't heard of anyone actually trying to figure out what happened when Lehman collapsed to India.
If Lehman collapses, why does India have to collapse in that manner? That was the first thing. Second thing, look at what the mutual funds were doing prior to that.
It's a caricature. It's not that I have the exact numbers. But caricature was that any mutual fund brought via that model would have one-third in public equity, one-third in government bonds, and one-third in public-slash-private credit to the middle-sized firms.
These were extremely illiquid assets, but you got paid handsomely for it because you could charge significant markup over G-Sec. And in fact, many of these mutual funds, in their illiquid portfolio that they held of these small, but they're not small, medium-sized firms, they've made higher returns than even in public equity. And in 2008, we are going through the best years to remember, 2004-2008.
Puja Mehra: Dream run.
Jahangir Aziz: Dream run, but they couldn't sell it. So what they did was to sell their public assets, which was either G-Secs, which they had, and it was equity market. And so something that the concern arose, the same argument, counterparty risk, that was a concern, right?
And you're holding these bonds and you don't know what the counterparty risk is, but you can't do anything, you just can't liquidate those because there's no mechanism to liquidate it. So you're liquidating a perfectly healthy public equity. So the question then becomes is that Lehman happened in 2008, we are in 2025, 17 years have gone by.
We still don't have a backstopping mechanism for corporate credit. I remember in 2008, we were even talking about, oh, let's take our foreign reserves and start a sovereign welfare fund. And I'm sure that even today, lots of people would say, okay, you have the 650, 700, but not in the last month yet.
But prior to that, what are we doing with all of these FX reserves, let's start a sovereign welfare fund. It comes up whenever the pressure on the rupee subsides, immediately everybody wants to go and start proposing sovereign welfare funds. But far more important than the sovereign welfare fund, I'm not saying use RDI FX reserves to backstop, but in the absence of a backstopping mechanism, you can't have a secondary market in corporate bond.
But if you don't have a secondary market in corporate bond, your primary issuance will be minimal. So an obvious thing, we have a lender of last resort for banks. There is no backstopping mechanism we have for corporate credit.
We also have sort of a lender of last resort for GSEC, which is RBI going into the secondary market, which RBI routinely does, and is doing it right now as we speak. But there's nothing on corporate bond. And we have this actual demonstrated example of what happens when you have people holding corporate bonds, and they cannot liquidate it, they liquidate something else, and you do not want that liquidation to take place.
So the transmission mechanism that happened because of this counterparty risk, fear, was immense in India in 2008. So what has mutual funds done now? They're not holding corporate bonds.
You only get stuck with another Lehman-like problem. There are no people around in the capital markets to fund, even if a medium-scale or a startup through two years, three years into existence wants to issue private credit or public credit. Because there is the backstopping mechanism, and this is not rocket science.
You can easily have a backstopping mechanism put in place. So clearly the government will have to take a risk if you have a backstopping mechanism. It is not that it's riskless.
The question is, do you think the risk is worth it? And that is where my concern is. There doesn't seem to be even a discussion whether the risk is worth taking because they seem to be extremely comfortable with no churning taking place in any sector in the Indian economy.
Concentration increasing, and no effort is being done to actually create new sectoral leaders. That wasn't the case in the run-up from 2000 to 2008. If you look at the companies listed in 2008, many of them didn't even exist in the late 1990s.
Most of them were new companies. We never even heard of these companies before. There was a sense that we needed to create new leadership.
And some of it went right, some of it went wrong. It isn't that we didn't have our own quota of scandals. It happened.
I'm not saying it didn't happen. But that's where I'm sort of looking for what the Ministry of Finance does for the remaining 364 days, and what are they doing specifically in their purview, which is capital markets.
Puja Mehra: I also want to ask you how concerned you are about nominal growth being what it is.
It was estimated, projected to be 10% in last year's budget. It is looking like the advance estimate says 8%.
Jahangir Aziz: Look, you can't have your cake and eat it. You can't tell me that it is not NSO's problem. They have a methodology, which they have been extremely transparent.
They are published on the website and has been there since 2012 when they changed to the new methodology. And that new methodology, as today it is widely discussed, it wasn't four or five years back, widely discussed, the methodology has a problem that a very large portion of the GDP, nominal GDP that they actually survey, is deflated by wholesale price index. Leave out agriculture, leave out mining, leave out about half of manufacturing, which is based on industrial production.
The rest of the economy, services, an extremely large portion of manufacturing is based on nominal things. And you are deflating even the WPI, which has literally no connection with the input prices that are required to produce them. You require a producer price index.
We have been talking about a producer's price index for 25 years. We have managed to send landers to the moon and Mars, but we still haven't managed to get a producer price index. And this is genuinely problematic.
So you have a WPI. The WPI mostly is oil prices. In the last three years, since the peak in, what, 22 after the Ukraine war, oil prices have been on a structural decline.
Oil prices fall, real GDP gets boosted. We look at those numbers, and we don't think that there is a big problem given the fact that nominal GDP itself is just moving up. A slowing nominal GDP, if properly done, which I'm guessing it is, right, because you are going and asking firms, you're doing surveys, you're asking what is the revenue that your Haldiram Bhujia generates.
So you're not doing anything, you're just doing a survey. And I think the NSO does that survey reasonably well. So I don't think any real problems with that nominal GDP.
And if a nominal GDP keeps on going down, apart from the other things, which is what it does to debt dynamics, what it does to earnings, etc., etc., etc., it also tells you something about the economy. Unless there are massive productivity gains that is happening in India, that has been unleashed all over India, which is not corroborated by data, it is clearly a sign that there is a significant amount of slack in the economy. And that slack is probably expanding, because nominal GDP is actually slowing rather than going up.
Puja Mehra: Dr. Aziz, for students and those who don't understand economics well, would you like to explain what you mean when you say there's slack in the economy?
Jahangir Aziz: Yeah. So take a more specific argument, right. So look at core inflation, take out gold, because gold shot up over the last one year, two years, leave out gold.
Core inflation, which is inflation without food, energy, and gold in this case, has been sliding since November of 2023. So we are now in month number 25, more or less, of a slide, and it's running at 2.6%. And if I don't tell you anything else, but I tell you that there's an economy that's been growing at 8% and 7% over the last two years, and its core inflation is 2.6%. So typically, it's not one year, one month, or two months. Typically, when you have a sustained decline in core inflation, it basically means that firms are unable to pass on higher prices.
They're losing pricing power. This is not food and energy, which depends upon the weather and depends on global conditions. You're just unable to do it.
And that is basically a very telltale sign that there is a lot of excess capacity in the economy or the firm side. Then there is a shortfall, a structural shortfall of demand on the demand side. And by demand, I just don't mean consumption demand, there's consumption demand and investment demand, specifically in the corporate side.
It is always a telltale sign. So regardless of what the real GDP growth numbers are telling me, what is nominal GDP growth numbers are telling me, even if I don't look at those things, if I just look at core inflation, which has been sliding continuously for 25 months, it is not being driven by accident or specific ad hoc factors. It is being driven by the fact that there is a lot of excess capacity, factory utilisation, your capacity utilisation isn't moving up, and demand is in structural shortfall.
And that, I think, is the far more ominous signal coming out of a sliding nominal GDP than its other impact, which is that, look, if the nominal GDP goes down, all your debt rations, because debt is being divided by nominal GDP, will go up. People start questioning that sustainability. Nominal GDP is what drives earnings.
Earnings run into a problem, not just for listed companies, for whole or non-listed companies. All of those things are true. Tax revenue falls because tax revenue depends on nominal GDP.
I'm not even going there. I'm just saying that it is a sign that this economy has a lot of excess capacity, and because it continues to slide, it means that the excess capacity is actually widening rather than closing.
Puja Mehra: Dr. Aziz, we hear the finance minister say time and again that she's done all that she could possibly. She's cut corporate tax rates. Monetary policy has responded, but corporate investments are not happening.
Private investments are not happening. Simultaneously, we also see a very gung-ho, self-congratulatory discourse coming out of the RBI when the government says we're in the Goldilocks phase. And a whole lot of economists in the government system who tend to say that India is doing exceptionally well in a very difficult global economy.
How do we look at this? If you're saying that we have a structural problem of demand and excess capacity, and we are probably not seeing adequate policy responses or at least precise policy responses that are needed, and simultaneously we have this self-congratulatory discourse going on, then what is the way out? Can it be addressed in the budget?
Jahangir Aziz: Look, I mean, different people will see the same things and will come with different interpretations. Goldilocks is a term that is misused in public discussions. Goldilocks is a term that has been specifically used for monetary policy.
When there's an economy in Goldilocks, when it's not too warm, it's not too cold. That's basically what it is. So you have an economy that's doing reasonably well.
It is not putting any pressure on inflation. So as far as monetary policy is concerned, you don't really have to do very much. And that's the Goldilocks scenario.
So if from a monetary policy standpoint, yeah, you're getting 6%, 7%, 8% growth rate. You're getting inflation to its lowest, beating your inflation target and borrows like 200 basis points, 200 percentage points. Yeah, I mean, you can always claim it's a Goldilocks.
That's what Goldilocks is supposed to do. The question is, where is the explanation as to why an economy that has been growing in 8s and 7s can have continuously sustained decline in core inflation? It has to come to that explanation.
As I said, you can say, well, there's been a massive increase in labour productivity. That's a very easy argument to verify. You have real GDP and you have labour statistics, whichever labour statistics you want to use.
I'm going to be agnostic about it. Take one, take real GDP and divide it by the total amount of employment. I look at what's happened to labour productivity.
Labour productivity has been declining.
Puja Mehra: We've done episodes earlier where economists have come to the show and discussed how labour productivity is actually declining.
Jahangir Aziz: Right, so what I'm saying is that if it's not productivity growth that is driving this decline in core inflation, then it has to be seriously questioned as to what is the explanation. And if you can't explain that, then you have to go back and ask the question, what is driving that? So that's the first answer.
The second answer is that since 2012, maybe it is 11, but you can decide it 11 to 12. But since then, corporate investment has not moved away from its 12% of GDP line by more than half a percentage point one year or the other. If for 13 years corporate India has not spent more than 12% of its revenue, I'm equating revenue with GDP, revenue in investing, it is not a cyclical problem.
We have gone through one cyclical explanation after another as to why corporate India is not doing, or there are green shoots happening, and then the green shoots burn out very, very quickly. You go back, demonetisation followed by weak implementation or problematic implementation, GST. Then you had the banking sector, non-performing loan problems. Then you had the Ukraine war.
Then you had the 500 basis points of rate hike by the Federal Reserve. And now you're turning around and saying, okay, fine, look, you have the U.S. imposing the 50% tariffs on India. You can come up with the ad hoc explanation.
But the ad hoc explanation's problem is that corporate investment has not moved in a cyclical manner. It has flatlined since 2012. And the question that is not being asked is that what are the structural reasons as to why corporate India refuses to invest?
And instead we are running towards cyclical solutions. You know, let's do this incentive and that incentive and put this and put that. I'm not saying that the government isn't making an effort.
What the government isn't doing in asking the question, how come for 13 straight years, corporate India has not invested? And I will go back to a point that I was making previously that I suspect, and I don't know the answer, I haven't done it myself, but I suspect, based on literature in other countries, that it has to do with the fact that there has not been any change in the sectoral leadership in any sectors over this entire period of time. When did we all look at corporate investment and was awed by corporate investment?
That was the period from 2000 to 2008. And that was a period when no-name firms out of complete nowhere would come in and would become household names in four or five years' time. Nobody knew the existence of those tech companies or the pharma companies or the infra companies or even telecom companies.
No one knew those names, even 10 years before that. There is a close connection. As I said, I haven't done it for India.
Again, this is something that I'm surprised that Indian academia doesn't do it. But if you look at academic literature across the world, there is a very close relationship between industry concentration and the lack of investment. Now, can the Ministry of Finance do very much?
Yeah, the Ministry of Finance can play around with the financial parts of it. As I said, one of the real problems, it's not the only problem, one of the real problems is the capital market, where it hasn't moved very much, or at all. In fact, it has become more intrusive and controlled than it was in the past.
The rest of the stuff, it has to do with other ministries. You just can't blame the Ministry of Finance for everything all of a sudden. What do the other ministries do?
I think all of this stems from the acceptance that this is not a cyclical problem, languishing of corporate investment. It's not a cyclical problem, it's a structural problem. And what are the structural roots of that problem?
Puja Mehra: Yeah, I think articulation of this, that probably finance ministry can do, and they can do it best. I don't expect any other ministry to be able to do that. And budget is when everybody is paying attention, so probably budget is the place to do it.
But like you said, I'm not expecting.
Jahangir Aziz: Fine, so if you don't want to put the blame on other ministries and put all the blame on the Ministry of Finance, civil aviation. Look at the industry concentration in civil aviation.
Puja Mehra: And the consequences.
Jahangir Aziz: And the consequences, right. But that has nothing to do with the Ministry of Finance.
Puja Mehra: No, absolutely, absolutely.
Jahangir Aziz: So what I'm saying is that other ministries also need to look at this and say they need to play a part in the broader development of India.
Puja Mehra: Right, right. No, yeah, absolutely. And my point was, probably a starting point is for the finance ministry to say that we need to get out of this mindset of accepting duopolies and...
Jahangir Aziz: There are more neutral players. NITI Aayog, PMESC. There are many more neutral groups than Ministry of Finance.
And Ministry of Finance obviously, other ministries always look at, okay, there has to be something that they're planning to do which is not good for us.
Puja Mehra: Okay, yeah, we can accept that as well. Right, thank you. Thank you so much for this conversation.
Jahangir Aziz: Sure.
