Raamdeo Agrawal explains how India found financial independence

TWENTY-FIVE YEARS AGO, ₹1 lakh crore of total profit across all listed companies was considered enormous. The reason was simple arithmetic: with price-to-earnings multiples of 15-20, the system needed roughly 5% of market capitalisation to show up as profit. A ₹200 lakh crore market cap required ₹10 lakh crore in profits for equilibrium, and that’s before accounting for loss-making companies whose market caps don’t correspond to any earnings at all. Today’s profit-to-GDP ratio stands at approximately 4.8%, a 17-year high, last seen in 2008. Corporate profits of around ₹16 lakh crore divided by GDP of ₹330 lakh crore puts India at an inflection point. And unlike previous peaks, this one appears structurally different. India has many more listed corporates, including a wave of internet and tech-driven businesses that will tend to be more monopolistic in nature. So, in the best of times, profit-to-GDP can very well move to 6-7%, even 8%, over the next 5-10 years. When money stays home The fundamental shift isn’t just in valuations. It’s also in the source of capital. Earlier, India never had robust, assured domestic retail flows. Today, steady inflows of domestic money continue regardless of whether individual companies make profits or losses. This raises an obvious question: will permanent domestic bids keep markets perpetually elevated? The answer is nuanced. While the market as a whole may remain elevated, individual stocks will still face brutal discipline. The market will always keep arbitraging between good businesses and bad businesses. A company trading at ₹3 lakh crore today can be marked down to ₹30,000 crore if it disappoints. Rotation is inevitable. But here’s the critical distinction: aggregate profit-to-GDP is a number spread across 4,000-5,000 companies. Even 30-50 internet companies don’t materially move that denominator. Whether the ratio sits at 4.74% or 4.85% is almost beside the point. The broader trend of corporate profit-to-GDP hovering around 5% has remained remarkably stable. What will push it higher isn’t individual company performance; it’s the structural inflow of equity capital itself. The balance sheet revolution Consider the transformation in capital structure. The traditional model was a 1:1 debt-to-equity ratio — ₹50 lakh crore of equity and ₹50 lakh crore of debt on a ₹100 lakh crore balance sheet. The new model looks more like ₹75 lakh crore of equity and just ₹`25 lakh crore of debt. The implications are immediate and powerful. Reduced interest costs flow straight to the bottom line. One example: a company with ₹800 crore of equity and ₹850 crore of debt raised a fresh ₹1,200 crore. Post-transaction, effective debt cost approached zero. Profits naturally jumped. This isn’t financial engineering. It’s a fundamental rewiring of how Indian businesses are capitalised. The equity flow coming in, ₹8-10 lakh crore, is a magical thing and it will transform the country, hopefully in a positive way. The venture capital gap Yet for all this progress, a critical gap remains: domestic venture capital. The logic is straightforward but uncomfortable. When ₹100 crore of American venture capital becomes ₹6,000 crore through a successful exit, that ₹6,000 crore leaves India. Had domestic venture capital provided the seed funding, the entire gain would recycle within the economy. The problem is cultural. Venture capital requires accepting losses in nine out of 10 investments to score one 100x winner. Indian investors want 10 out of 10 successes. We want to earn in all 10. We don’t want to say, ‘I’ll lose in nine places but make 100x in one.’ But that is venture capital. Venture capital only flows from abundance. It comes from America, not emerging markets, because there’s so much capital that investors don’t know where else to deploy it. They’re willing to take asymmetric bets: lose small in many places for the possibility of massive returns in one. India isn’t there yet. But it will get there. Over the next 10 years, a massive flow of domestic money will go into venture investing. As the current generation of entrepreneurs realises ₹1 lakh crore exits, some portion will flow back into early-stage investing. The pay-it-forward model will emerge, creating serial entrepreneurs and angel investors. America is the ultimate capitalist country. We are like a mini-America. A poorer America, but the trajectory is similar. In 1984, America was a $4 trillion economy. After 40 years, we have become a $4 trillion economy. Of course, none of this happens in a frictionless environment. For all the talk of ease of doing business, the reality in older sectors remains stubbornly difficult. The difficulty of doing business in India is still very high, especially in old economy sectors. Financial services may have modernised, but traditional industries remain entangled in outdated regulations. Try opening a hotel, and half the promoters will go crazy dealing with the process. So, how do you build tourism? How do you even host large weddings? The ones that exist are exorbitant. As a result, people go to Thailand or Dubai. India exports business that should naturally accrue to it. Until India modernises its regulatory architecture for older sectors, friction will remain high. India has now entered a self-sustaining capital formation cycle that no longer depends primarily on foreign flows. The tailwinds are real: expanding equity capital, improving balance sheets, rising profit-to-GDP, deepening markets, and an emerging class of scaled digital businesses. (As told to V. Keshavdev. The author is Chairman and co-founder, Motilal Oswal Financial Services Ltd. Views are personal.)

Raamdeo Agrawal explains how India found financial independence

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