Discuss the major structural weaknesses of India’s capital markets and their implications for the mobilisation of resources for productive investment.

A well-developed capital market mobilises long-term savings and channels them into productive investments, thereby supporting capital formation, industrial growth and economic development. However, India's capital market continues to face several structural challenges that limit its effectiveness.

Structural Weaknesses of India's Capital Market:

• Excessive Financialisaton:
  • Household savings are increasingly flowing into speculative
  • As highlighted in the Economic Survey 2024-25, about 91% of financial activities rather than productive assets. individual traders incurred losses in equity derivatives in FY25, with net losses of about ₹1.06 lakh crore.
• IPO-led Capital Formation: IPO fundraising reached record levels (about ₹1.6 lakh crore in FY26 up to December 2025). However, Offer for Sale (OFS) accounted for about 58% of the proceeds, implying that much of the money went to existing shareholders rather than financing new investment.
• Underdeveloped Corporate Bond Market: India's corporate bond market is only about 15–18% of GDP, significantly lower than South Korea (~80%) and China (~36%). Firms remain heavily dependent on banks for long-term finance.
• Volatile Foreign Portfolio Flows: Foreign Portfolio Investment (FPI) is highly sensitive to global risk sentiment, leading to volatile capital inflows and outflows.

Implications for Productive Investment:

• Household savings are diverted from productive capital formation towards speculative activities.
• Limited availability of long-term finance constrains infrastructure and industrial investment.
• Excessive dependence on banks increases concentration of credit risk.
• Volatile foreign capital flows create uncertainty and affect investment planning.
• Weak mobilisation of domestic resources limits employment generation and long-term economic growth.

Way Forward

• Deepen the corporate bond market by improving liquidity and broadening the investor base.
• Promote long-term institutional investors such as pension and insurance funds.
• Encourage greater retail participation in debt markets.
• Strengthen regulatory oversight to curb excessive speculation.
• Promote financial instruments that channel household savings into productive investment.

India's capital markets have expanded considerably, but their true success should be measured by their ability to mobilise long-term domestic savings for productive investment rather than speculative financial activity. Deepening debt markets and improving financial intermediation will be critical for sustaining investment-led growth.