BG Srinivas
India has one of the world’s largest foreign-exchange reserves—about US$734.6 billion as of early October 2026. Yet it cannot reliably manufacture several critical inputs on which its economy depends, from rare-earth magnets to active pharmaceutical ingredients. When China restricted magnet export licences in 2025, Indian electric-vehicle manufacturers faced supply-chain disruptions. A country with such a large financial cushion could not instantly overcome that industrial constraint.
This is not simply bad luck. It reflects a deeper challenge: India’s financial system must do more to direct affordable, long-term credit towards productive capacity. Manufacturing’s share of GDP has remained below the levels India needs to achieve its industrial ambitions. The financial ledger has grown, but the material ledger remains inadequate in several strategically important sectors.
The argument for Banking Swadeshi is simple: India must rethink its banking and monetary priorities so that credit builds productive capacity, not merely financial assets and consumption.
The Rulebook in Plain English
Imagine two manufacturers: one in Pune, the other in Guangdong. Both want to borrow to install a new production line. Their prospects depend heavily on the cost and availability of credit.
India’s challenge is that manufacturers, particularly smaller enterprises, often struggle to secure affordable, long-term finance. Their competitors in economies with deeper industrial-finance ecosystems may enjoy cheaper credit, stronger supply chains and greater policy support.
India’s inflation-targeting framework requires the Reserve Bank of India (RBI) to keep consumer-price inflation close to its 4% target, with a tolerance band of two percentage points on either side. Interest rates, however, are only one determinant of borrowing costs. Bank margins, credit risk, collateral, loan tenure and the borrower’s financial strength also matter.
Comparisons between Indian and Chinese lending rates can illustrate the competitive challenge, but they must use comparable loan categories, periods and inflation measures. A simple subtraction of current inflation from a lending rate provides only an approximate real interest rate, not the precise cost of industrial borrowing.
The broader point remains: when Indian manufacturers face persistently expensive credit, particularly small and medium enterprises, their ability to invest, expand and compete is weakened.
Large Indian companies can raise equity or issue corporate bonds. Most small manufacturers cannot. They depend heavily on banks. For them, access to credit is not a financial abstraction; it can determine whether a factory is built, a production line upgraded or a business expanded.
Why Small Factories Lose
India has a vast base of small manufacturing enterprises, but only a limited proportion of businesses can access public equity markets. The firms most likely to become tomorrow’s industrial champions often lack that option. They need bank credit.
Bank regulation also influences how lenders allocate their capital. Under the RBI’s capital-adequacy framework, unrated corporate exposures generally attract a 100% risk weight, while certain large unrated exposures can attract 150%, subject to the applicable rules. Risk weights vary with ratings, exposure categories, collateral and other regulatory conditions. Housing loans, too, are subject to risk weights that depend on their characteristics.
Government securities generally receive favourable regulatory treatment because sovereign credit risk is treated differently from ordinary corporate lending.
These differences affect how much regulatory capital banks must maintain against their assets. Higher capital requirements can make some categories of lending less attractive, although the actual cost also depends on default risk, operating expenses and expected returns.
For a bank, lending to a small factory can therefore be less attractive than holding government securities or extending certain housing loans. The rational response, within the existing incentives, may be to favour assets that offer a more predictable return for the capital deployed.
This is not necessarily because bankers dislike industry. It is because the regulatory framework, risk assessment and commercial incentives do not always reward patient industrial lending adequately.
Government Bonds Set the Hurdle
Government borrowing also influences the allocation of financial resources. Banks must maintain a prescribed proportion of their net demand and time liabilities in liquid assets, including eligible government securities, under the statutory liquidity ratio (SLR).
Government bonds provide banks with a relatively predictable return and favourable regulatory treatment. Private manufacturers, by contrast, must offer returns sufficient to compensate lenders for credit risk, uncertainty and the cost of capital.
This creates a structural challenge. When government borrowing is substantial and private industrial projects carry higher perceived risks, manufacturing enterprises can find it harder to compete for finance.
Government securities are essential to financial stability, and the state cannot be expected to stop borrowing altogether. The question is whether the financial system strikes the right balance between sovereign financing and the productive investment required to expand the economy.
Foreign-exchange reserve management adds another dimension. When the RBI purchases foreign currency, it generally injects rupee liquidity into the banking system. It can absorb that liquidity through various instruments when necessary to maintain monetary and financial stability. However, reserve accumulation does not automatically tighten domestic credit: the overall effect depends on how the RBI manages liquidity and conducts monetary policy.
The policy question is whether India can safeguard external stability while ensuring that productive enterprises have adequate access to finance.
Credit Is Moving Away From Industry
The distribution of incremental bank credit deserves close scrutiny. The article’s cited figures indicate that, between March 2021 and March 2025, outstanding personal loans grew by roughly ₹25.3 lakh crore, while credit to industry increased by about ₹10 lakh crore.
If these figures are confirmed on a consistent RBI statistical basis, they illustrate the faster expansion of personal lending relative to industrial credit. However, personal loans cover several categories, including housing and other forms of borrowing; they should not all be equated with unproductive consumption.
Similarly, banks’ SLR holdings reportedly rose from ₹37.5 lakh crore in March 2020 to ₹60.2 lakh crore in March 2024. This increase reflects the accumulation of government securities, but it should not be interpreted as an equivalent amount of fresh government borrowing financed exclusively by banks.
Taken together, these trends raise a legitimate policy question: is enough incremental finance reaching the enterprises that create manufacturing capacity, employment and export competitiveness?
The concern is particularly important if industry’s share of non-food bank credit has declined substantially over the years. The precise percentages and comparison dates should be verified against consistent RBI data before publication.
The objective should not be to deny households access to credit or to discourage investment in government securities. It should be to ensure that industrial investment does not become the neglected priority in a rapidly expanding economy.
The CPI Blind Spot
India’s inflation target is based on the Consumer Price Index (CPI), in which food and beverages have a substantial weight. Food prices can rise sharply because of deficient rainfall, vegetable supply disruptions, animal-disease outbreaks or global edible-oil prices.
Raising interest rates cannot make it rain or grow more onions. Yet a broad monetary tightening in response to persistent headline inflation can increase borrowing costs across the economy, including for manufacturers whose investment decisions have little connection with food prices.
The result can be that the factory pays part of the price for the onion. A supply-side food shock may contribute to higher financing costs for an industrial project even when demand in that sector is not excessive.
This is not an argument for ignoring food inflation. Rising food prices hurt households, especially poorer families, and can influence inflation expectations and wages. Nor can core inflation be treated as a perfect substitute for headline inflation.
The better approach is to distinguish supply-driven price shocks from excessive demand and to coordinate monetary policy with measures addressing agricultural productivity, storage, transport, imports and distribution.
India should examine whether its inflation-targeting framework can respond more intelligently to different sources of inflation without compromising price stability or unnecessarily discouraging productive investment.
The Human Cost
Manufacturing’s employment record also warrants attention. The figures cited in this article suggest that manufacturing employment fell from about 51 million in 2016–17 to 27.3 million in 2020–21. That is a decline of nearly 24 million, although pandemic disruption, changes in survey methodology and differences in employment classification must be considered before drawing conclusions.
It would be inaccurate to attribute the entire decline to monetary policy. Nevertheless, the broader challenge is undeniable: India needs an industrial ecosystem capable of creating millions of productive, reasonably well-paid jobs for its growing workforce.
The financing problem is not new. An RBI expert committee chaired by U.K. Sinha estimated a substantial credit gap for micro, small and medium enterprises in 2019, commonly reported in the range of ₹20–25 lakh crore.
When viable small businesses cannot obtain formal finance at reasonable rates, they may postpone expansion, remain technologically backward or turn to expensive informal borrowing. That weakens productivity and limits their ability to become larger employers.
PLI Cannot Fix a Monetary Problem
India has recognised the need to strengthen domestic manufacturing through Production Linked Incentive (PLI) schemes. The government announced aggregate outlays of ₹1.97 lakh crore across the schemes. By December 31, 2025, reported incentive disbursements had reached ₹28,748 crore.
These schemes have supported investment and production in several sectors. They should not be dismissed. But incentives paid after eligible production or performance milestones cannot, by themselves, resolve every financing constraint faced before a factory is built.
That is the central limitation. A manufacturer may have a promising product, a market and eligibility for government support, yet still struggle to secure affordable long-term finance for machinery, research, tooling and expansion.
PLI disbursements and total bank-credit flows are not directly comparable: one is government incentive expenditure, while the other is a change in outstanding lending across broad categories. Nevertheless, the distinction highlights the need for complementary policies. Subsidies can encourage production, but a reliable financing ecosystem must help businesses acquire the capacity to produce in the first place.
India cannot rely on incentives alone to overcome structural disadvantages in the cost, availability and tenure of industrial credit.
An Imported Creed?
Why did India adopt its present monetary and regulatory framework? Part of the answer lies in the influence of international economic thinking.
Raghuram Rajan, RBI Governor from 2013 to 2016, studied at MIT and taught at the University of Chicago. Urjit Patel, who chaired the committee that proposed India’s inflation-targeting framework, studied at Oxford and Yale and worked at the IMF. Their educational and professional backgrounds reflect the international character of modern monetary economics.
Foreign education is not the problem. Nor does international experience automatically make a policy unsuitable for India. The real question is whether frameworks developed or popularised in different economic circumstances adequately account for India’s development needs.
Price stability, independent central banking and Basel-style capital rules serve important purposes. But their implementation must be assessed against the realities of an economy where millions of enterprises still need investment, technological upgrading and access to long-term finance.
The United States itself has deployed substantial industrial-policy support through measures such as the CHIPS and Science Act and the Inflation Reduction Act. Whatever the merits or shortcomings of individual programmes, they demonstrate that major economies are willing to use public policy to strengthen strategic industries and domestic supply chains.
India should be equally confident in adapting global best practices to its own circumstances rather than treating any economic orthodoxy as beyond debate.
The Older Indian Tradition
India does not need to abandon modern economics to rediscover the importance of production.
Kautilya’s Arthashastra placed productive capacity, trade, agriculture, mines and the treasury at the heart of statecraft. Wealth arose from economic activity, and the strength of the state depended on its capacity to sustain that wealth.
Dadabhai Naoroji warned against the colonial economic drain that extracted wealth while weakening India’s productive base. M.G. Ranade challenged laissez-faire orthodoxy and advocated public support for industrial development. M. Visvesvaraya’s famous injunction, “Industrialise or perish,” captured the urgency of building productive capacity.
The 1944 Bombay Plan, supported by prominent industrialists including J.R.D. Tata and G.D. Birla, recognised the need for coordinated investment and an active developmental role for the state. Its underlying lesson remains relevant: industrialisation on a large scale requires more than private capital operating without strategic direction.
These thinkers understood that financial strength and national prosperity cannot be separated from the capacity to produce goods, create employment and develop technology.
The financial ledger matters. But it must serve the material ledger.
Five Terms in Plain Words
- Risk weight: The regulatory weight assigned to an exposure when calculating how much capital a bank must hold. Higher risk weights generally increase the capital required.
- SLR: The proportion of a bank’s net demand and time liabilities that must be maintained in prescribed liquid assets, including eligible government securities.
- Sterilisation: The process of absorbing or offsetting domestic liquidity created by foreign-exchange intervention.
- Real interest rate: An interest rate adjusted for inflation. Subtracting current inflation from a nominal rate provides only an approximation.
- Inflation targeting: A monetary framework in which the central bank seeks to keep inflation around a specified target. India’s target is 4%, with a tolerance band of plus or minus two percentage points.
What India Must Change
India does not need to abandon price stability, banking discipline or financial credibility. It needs to rebalance its priorities through carefully designed reforms.
- Refine the inflation response. Examine ways to distinguish supply-driven food-price shocks from demand pressures, strengthening supply-side responses while preserving the credibility of the inflation target. A failed monsoon should not automatically translate into unnecessarily expensive industrial finance.
- Review risk weights. Assess whether appropriately verified manufacturing capital expenditure, particularly by viable MSMEs, can receive more suitable prudential treatment without compromising bank soundness. Risk-based lending must remain rigorous; the answer is better risk assessment, not indiscriminate subsidisation of loans.
- Make priority-sector lending more effective. Evaluate whether directed-credit mechanisms deliver measurable improvements in productive investment, employment and exports. Any reforms should preserve access to essential credit while reducing incentives for mere compliance without meaningful economic outcomes.
- Build a development-finance channel. Strengthen long-term, rupee-denominated industrial finance through a properly capitalised development-finance institution, with transparent governance and appropriate safeguards. Any RBI refinancing arrangement must be consistent with the central bank’s mandate and financial-stability objectives.
- Use trade policy strategically. Support the development of domestic capacity in electronics, solar technology, pharmaceuticals, machine tools and critical materials. Targeted, time-bound assistance should help firms achieve scale and competitiveness rather than create permanent dependence on protection.
- Manage volatile capital flows. Recognise that short-term portfolio flows can amplify financial instability. Policies should strengthen resilience while preserving access to productive foreign investment and avoiding unnecessary barriers to capital formation.
- Protect reserves while investing in strategic capacity. India’s foreign-exchange reserves are an important buffer against external shocks and cannot be treated as a freely available industrial fund. Rather than diverting reserves indiscriminately, India could examine carefully governed mechanisms for financing strategic supply chains through domestic savings, development institutions and appropriately structured investment vehicles, without compromising external stability.
The Choice Before India
China and South Korea used combinations of directed credit, industrial policy and long-term finance to build manufacturing depth. Their experiences are not identical, and their models cannot simply be transplanted into India. But they demonstrate that industrial capacity does not emerge from financial markets alone; it also depends on institutions, infrastructure, skills, technology and sustained investment.
India has built considerable financial strength and international credibility. It must now ensure that these advantages translate into deeper domestic manufacturing and reduced dependence on critical imported inputs.
True self-reliance is not measured only by foreign-exchange reserves, bond-market access or credit ratings. It is measured in furnaces, semiconductor fabrication plants, presses, machine tools, laboratories and the skilled people who operate them.
Banking Swadeshi does not mean closing India to the world. It means ensuring that India’s banking rules and financial institutions recognise the strategic value of what the country can produce, not merely what it can finance or hold.
It means credit that helps build smelters as well as homes, factories as well as financial portfolios, and technological capabilities as well as financial wealth.
India’s next stage of economic nationalism must be material, not merely rhetorical. Its measure should be productive capacity, industrial resilience and the quality of employment it creates.
Industrialise, or perish.
