Disaggregating India’s savings and its risk capital challenge

Does India have a problem of risk capital deficiency? More specifically, is there a disproportionately greater bias towards public markets among India’s savers, especially among high-net-worth individuals (HNIs)? 

I blogged here, arguing that India suffers from a deficiency of risk capital to finance the formation and growth of small and medium enterprises (SMEs). After that, I received some pushback, pointing to the spate of SME IPOs in recent times. 

I had been thinking of digging up the numbers and seeing how they stack up. In this context, I came across this review of a book by Ameer Shahul that argues that private equity is damaging India’s health care. While I’m sympathetic to this argument, the point that is relevant to this post is the dominance of foreign investors in these PE deals. I had blogged hereabout PE in India’s hospitals. 

I used Claude to look deeper into India’s numbers on risk capital, how they compare with global peers, and what their trends have been. 

The headline story is that India does not lack risk capital, but it channels it into liquid public markets, leaving the control of market segments like essential-service assets, and the value created in the private phase, largely to foreign capital. 

The decomposition goes something like this. The Gross Domestic Savings (GDS), contributed by households, the private sector, and governments, gets distributed between physical (primarily land and gold) and financial (deposits, risk capital, and pension/insurance). Risk capital, in turn, gets further distributed between public (stocks and mutual funds) and private (alternative investments) markets. Business formation requires a deep pool of the risk capital flowing into private markets. 

So, let’s start with the GDS. Clearly, India is second only to China in domestic savings as a share of GDP, though given its fast growth ambitions, it must increase this share. The problem is that over 40% of household savings are invested in illiquid assets. 

More disturbingly, 54% of the financial savings go into deposits, and just 13% goes into any kind of risk capital investments. On the positive side, 33% goes into long-term investments like insurance and pensions. 

However, as a percentage of GDP, these numbers on financial savings pale in comparison to even its emerging market peers. Risk capital assets (public and private markets) make up just 10% of GDP. 

Interestingly, among corporates, financial investments and dividends and buybacks have been rising at the expense of capex, in both absolute and relative terms. 

Back to household savings. Within the basket going into securities, as the CRISIL/IVCA/360 ONE Unlocking Domestic Capital report informs, what goes into private markets, the genuine risk capital, is a tiny sliver. And this is a big problem. The envelope of capital available for business formation is truly small. 

Let us disaggregate the risk capital basket further. Whereas roughly ₹1.5–2.0 lakh crore a year flows to private markets through domestic LPs in AIFs, much of that is private credit, real estate, and Category-III (hedge funds, private-public hybrids) rather than genuine growth equity. So domestic public-equity inflows run at four to five times domestic private risk capital, and foreign investors still supply much more private risk capital (₹3.0 lakh crore) than Indians do. 

All this means that we have a very interesting situation where, while foreigners are net sellers of listed equity, they remain the dominant suppliers of private capital. In stark contrast, domestic money flows the other way.

Indian HNIs park around 15% of portfolios in alternatives, the same as global HNIs. The gap opens for the segment that actually anchors private markets, the ultra-UHNW investors and family offices who allocate 40–50% to alternatives, with private equity typically the single largest bucket. In contrast, Indian UHNIs hold more real estate and gold than global peers and route their alternatives into yield and public-linked structures. In other words, Indian private wealth under-supplies illiquid equity risk, not alternatives in general.

This scarcity of private risk capital makes India, with its very large foreign investor base, very attractive for foreign Global PE and sovereign funds put roughly $15.5bn into Indian healthcare over the past five years, with hospitals taking about 68% of it. For example, Blackstone holds around 80% of KIMS Kerala and 73% of Care Hospitals, and Temasek holds about 59% of Manipal. The domestic exceptions are the listed, promoter-anchored chains like Apollo and Medanta/Global Health. Much of the foreign PE inflows are actually SWF/pension capital. In education, it is the K-12 market that is attracting the attention of foreign PEs. 

Banking is a counter-example where heavy foreign capital and domestic control coexist perfectly well. This is also because a sectoral regulator caps ownership, screens holders, and enforces diffusion. 

India’s risk capital challenge starts with unlocking the roughly two-thirds of household savings that sit in real estate and gold, and further increasing the share that goes into risky capital investments, specifically private risk capital markets. 

So how have been the trends over time?

Encouragingly, the share of household financial savings going into public equity and mutual funds has grown from 15% to 23% over the 2019-25 period. Thanks to mutual funds and SIPs, the number of individuals investing in capital markets has risen nearly fivefold since 2020 to around 135 million. This has been a truly transformational change, a genuine big-bang success. 

For context, domestic institutions poured a record ₹8.5 lakh crore into equities in FY26, of which mutual funds supplied ₹6.4 lakh crore, while foreign portfolio investors were net sellers of ₹1.8 lakh crore. That domestic flow is driven by SIPs, which came at around ₹28,464 crore a month (or about ₹3.4 lakh crore a year) across 9.7 crore accounts. Further, in a reflection of the trend of exodus of foreign capital from the equity market, the domestic institutional ownership of NSE-listed stocks crossed foreign ownership in 2025 (roughly 17–19% versus FPIs’ 17–18%) for the first time. 

On the private capital side, for a long time, even for Indian GPs, the majority of capital raising came from foreign LPs. As an illustration, 85% of the funds raised in India’s largest PE fund came from foreign LPs. Large control buyouts remain predominantly foreign. However, encouragingly, Indian LPs have been stepping up. Foreign LPs’ share of AIF fundraising by Indian GPs has been declining, now contributing only about a third of the total capital raised. 

In the aggregate for all private capital raising too, Indian investors are stepping up. The CRISIL/IVCA/360 ONE Unlocking Domestic Capital report shows that domestic investors have now surpassed foreign investors in fundraising by Category I and II AIFs. The share of domestic investors as a percentage of gross funds raised across them has touched 52.7% by June 2025.

The good thing is that the domestic private pool, especially the AIF commitments, is growing fast. AIF commitments climbed from roughly ₹6.4 lakh crore (Mar 2022) to ₹8.3 (Mar 2023), ₹11.3 (Mar 2024), ₹13.5 (Mar 2025) and ₹16.94 lakh crore by March 2026, a near 30% CAGR, with Category II (PE/RE/credit) about three-quarters of it. 

The report also disaggregates the changes in the destinations of private capital investments over the 2020-25 period. Startup and growth capital are useful for business creation and growth, whereas buyout capital reflects confidence in acquiring established businesses. They come mainly from the AIF I and II universe. The growing shares of private investments in public equity (PIPE) (mainly by the family foundations of HNIs) and private credit are matters of concern. 

The graphic below consolidates everything into one figure. It is clear that domestic capital, whether retail, institutional, or HNI, overwhelmingly favours public markets over private capital markets. HNIs too favour liquid public equity, credit, and real estate. Even the ultra-HNIs tend to avoid illiquid growth equity.

One important channel for private risk capital is institutional investors. As we saw, at 26% of GDP, the share of household financial savings going into pensions and insurance funds is 2.5 times that going into all kinds of risk capital. 

But if we look at domestic private market flows, while the actual flows into growth equity is itself small, the share coming from institutional investors is tiny. Of the domestic capital going into private markets (AIFs), roughly 70% is individual (HNIs, UHNIs and family offices) and only about 30% is institutional, and even that institutional slice is mostly corporate treasuries and government seed funds, not the long-horizon pools that anchor private markets abroad. In this too, India stands as the mirror image of every mature market. 

As an illustration, EPFO, the country’s largest retirement fund with about ₹24.8 lakh crore of assets, has nothing invested in AIFs, despite being permitted up to 5% of incremental flows. The same is the case with NPS, with about ₹14.4 lakh crore. Whereas life insurers are allowed up to 3% and general insurers up to 5%, less than 1% of their limit has been invested. It is estimated that LIC alone could put in ₹1.3 lakh crore if it used its full headroom. The institutional share comes mainly from government-backed funds-of-funds (SIDBI, SRI Fund, NIIF, NABARD, BIRAC and others), which have ₹24,293 crore committed. The pension–insurance–endowment complex that dominates private markets elsewhere is missing. 

Globally, institutional investors form the private-market LP base. In the US, university endowments like Yale invest roughly 30–40% in private equity and venture, and the US, Canadian, and Dutch pension funds and insurers are enormous private-market LPs. The CRISIL report says that US family offices allocate 54% to alternatives, US pension funds have gone from 9% to 14% in private equity over 2021-25, and OECD pension funds across 15 jurisdictions average about 22% in alternatives, up from 12% in 2001. In stark contrast, India’s own pension and insurance systems hold more than ₹110 lakh crore of assets, almost none of it in private markets. 

The likes of China and Israel closed exactly this gap by mobilising domestic pension and insurance capital to anchor their private ecosystems. 

Because the anchor institutions are absent, the domestic private pool is thin and individual-funded, which is exactly why even the largest Indian GPs still raise ~85% of their capital abroad. Building the institutional LP base and deepening the private capital pool requires institutional investors to shed their risk aversion and start utilising their permissible limit for alternatives. This should be followed up with gradual reforms to SEBI accredited-investor and co-investment regulations, and gradual loosening of PFRDA/IRDAI mandates.

Apart from the substantive requirement of such private risk capital to sustain the country’s high growth aspirations, the global geopolitical risks and the likelihood of capital wars make these aforesaid reforms imperative. 

The global crisis of falling student learning outcomes

The results of the latest round of the three-year OECD PISA school learning outcomes survey of 15-year-olds in 38 OECD countries and 53 other places provide firm evidence that what people have been suspecting is true — technology, turbocharged by AI, may be detracting from learning. 

It finds scores declining worldwide, with fifteen-year-olds in high-income countries falling roughly 1.5 years behind their 2015 counterparts in literacy, knowledge, and reasoning skills. The declines are pronounced in literacy and numeracy. 

The East Asian countries remain at the top of the charts in all three subjects, as they have been since the beginning. Performance has declined across the board since 2015, with Turkey being an exception. 

The Economist writes

The latest scores on PISA tests of reading, maths and science, released on September 8th, are the worstsince the tests, administered by the OECD, began in 2000… In 35 rich countries that take part in the tests, a typical 15-year-old now reads no better than a 14-year-old did a decade ago… PISA scores began drifting downwards around 2012. The evidence is growing that tablets, mobile phones and other such screens are distracting youngsters from their studies and diverting them from hobbies, like reading books, that instil the ability to focus… And precisely because AI will increase the temptation for people to outsource difficult cognitive tasks, schools have an extra duty to help pupils exercise their brains and acquire the hard habits of thinking. Failure to furnish them with the basic building blocks of a well-developed mind, such as literacy and numeracy, is inexcusable.

The report points to a decline in key skills like drafting or critically evaluating texts at the expense of skim reading and limited understanding. 

The connection between passive technology consumption and lower scores was “compelling”, even though the study did not provide direct evidence of cause and effect, said Andreas Schleicher, director for education and skills at the OECD… Reliance on AI, the survey found, tended to produce worse scores in science for both pupils and education systems, with 37 per cent of students prioritising “common sense” over scientific reasoning… That will serve them ill in the AI age, when “reflection and complexity” will be all the more important… With those skills “declining rapidly”, young people now “read faster” than in 2018, but “less accurately”, he explained… Schleicher linked the decline in the latest scores to the dominance of distracting short-form videos on platforms such as Instagram and TikTok, as the report suggested that “digital distraction” is harming education across the world.

Andreas Schleicher, OECD’s long-standing Director of Education, points to possible explanations.

Reading, the gateway to all learning, has declined sharply. Between 2018 and 2025 performance fell in three-quarters of the countries. Across the OECD, it was down by 25 points—more than a year of learning. Much of this decline happened between 2022 and 2025. The biggest surprise is who fell furthest behind. It was not the most disadvantaged students, but those from wealthy families, which points to a much broader challenge than inequality alone…

Most troubling is the deterioration of the very skills that matter most in the AI age: evaluating information, making connections across multiple sources and thinking critically about what we read. Since 2018, the number of instances in which students rush through texts and give quick but incorrect answers has almost doubled… We cannot say for sure, but falling levels of reading for enjoyment and the shift towards digital reading—skimming social-media feeds and rapidly processing information—may be reducing the ability of students to engage with complex texts and data… when personal devices are used for leisure during school, student performance falls sharply. This raises questions about whether devices such as smartphones, designed to maximise a user’s attention, are compatible with sustained academic attention.

… students who use chatbots for tasks such as summarising texts tend to get lower scores than those who don’t, and are more likely to report lower levels of intrinsic motivation for learning… we do not get fit by watching sports, but by doing sports. In the same way, learning is always about cognitive struggle. Rather than make things easier, we need rigorous, focused and coherent learning environments that make students stronger. In PISA, both individuals and countries perform better when students believe that success is about hard work rather than talent, and when they see failure as an opportunity for growth.

Schleischer also points to an increase in the number of test-takers classed as “hasty readers” who blast briskly through the literacy assessment while getting many of the answers wrong.

The report found that those who used AI “almost every day” (and thereby effectively off-loading cognitive tasks to AI) were much less able to summarise or draft texts than those who “almost never” used it. 

Conversely, students who used AI daily “to help me learn”, rather than replace thinking, do better than those who use it less frequently.

Schleicher makes important suggestions about better use of AI.

High-performing systems such as China, Estonia, South Korea and Singapore are leading that shift, deploying ai not to give students ready-made answers, but to help them think about the right questions, reason analytically and learn more effectively. Few countries would allow millions of children to receive a new vaccine without first demanding rigorous clinical trials. Yet in education we introduce new technologies into millions of classrooms with remarkably little evidence about their impact, turning students into unwitting crash dummies for tools we do not yet fully understand… Where smartphones and ai are part of the learning environment, their use must be intentional, not incidental. Schools need clear frameworks defining when, where and how ai should be used. For younger learners, it should not be treated like an oracle. That means strong filters. No emotional manipulation. No pretending to be a friend, a confidant or, worse, a replacement for social interaction.

However, there may be more factors at work in the declines than just AI or Covid 19 legacy. Given that the declines precede both, one argument blames the proliferation of smartphone use, with its endless content causing distraction and reducing mental bandwidth. There is a large body of well-established research on this. Jonathan Haidt has documented the problems of the anxious generation. 

Another more structural explanation could be the changes in pedagogical aspects over the last couple of decades. In many countries, the disciplined processes of delivering content, rigorous assessments, standardised tests, and strict school governance have been relaxed in favour of less stressful and more joyful learning environments, lower-stakes testing, less insistence on attendance, and others like no-detention policies. Progressive ideologies have been a driving force behind many of these shifts. 

Finland, once the top-performing poster child for school learning outcomes and a must-visit pilgrimage location for education policymakers, is an instructive example. Its top position in PISA for long was thought to be underpinned by its relaxed testing, limited testing, and play-based learning. But it has suffered among the steepest declines and has now fallen to the middle-rung. 

John Burn-Murdoch points to possible reasons.

During the 2000s education officials flocked to Finland — the top performer in Pisa scores of the day — to learn from what it was getting right. They saw a system that prized flexibility and autonomy for pupils and a curriculum prizing “transferable skills” like critical thinking while placing less emphasis on core subjects and standardised testing or performance rankings. Glowing reports were written, and the Finnish model spread. There was one problem: even as these visits were taking place, Finnish scores were in a sustained slide. Today, its results are little better than the average country, and many argue its exceptional performance — which peaked around 2000 — owed more to the conventional comprehensive approach it had used in previous decades.

Finland’s experience mirrors those in other countries with similar shifts to less rigorous teaching methods, like Sweden in the 1990s and Scotland’s Curriculum for Excellence of 2010.

Progressives too easily dismiss the value of traditional teaching, but facts are the building blocks of critical thinking and tackling repeated algebraic problems, for instance, hones abstract reasoning.

These declines sit alongside the impressive performance of the UK, which held on to traditional methods and even improved on them. 

Recent results in the UK support this theory. Scotland, Wales and Northern Ireland went down similar routes to Finland during the 2010s, shifting away from established curricula and towards more broadly defined learning outcomes, scrapping school league tables and some standardised tests. By contrast, England doubled down on the established curriculum with strict guidance on the content schools must cover in core subjects, alongside the use of league tables with performance measures that made the rankings harder to game. Fifteen years on, England’s results have held up, propelling it into the top ten internationally, while in Scotland, Wales and Northern Ireland they have plummeted… Schoolchildren in England report the same levels of happiness or pressure as those in Scotland and Wales, and no difference in mental health. 

This is a good description of what the UK did right starting about 15 years back.

The nation made its curriculums more fact-filled (some prefer to say “knowledge-rich”) at a time when policymakers elsewhere had been waxing lyrical about instilling vague soft skills. It made exams more rigorous, deprioritised coursework (on which it is easy to cheat) and toughened inspections. Politicians also sought to steer schools away from newfangled styles of instruction that are fashionable but untested, and back towards methods that are more dyed-in-the-wool… Twenty years ago children in Scotland outperformed their peers south of the border. Now they tend to do worse—even though school spending per pupil is much higher. Scotland’s critics blame a modish curriculum, as well as a lax approach to discipline.

Echoing this, The Economist article calls for a return to the boring basics of schooling that were shed as abstract ideas of social justice and concerns about mental health took hold. 

Places that have avoided declines deserve more attention. Britain is one. In 2009 its pupils scraped into the world’s top 30 in maths and reading. Now they sit in the top ten. Some of this stems from a return in England, under a previous Conservative government, to old-fashioned things such as rigorous exams, tough inspections and fact-filled curriculums.

Burn-Murdoch points to another example of a similar approach, from the poorer southern states like Mississippi in the US, which have overtaken their wealthy counterparts like California. 

Improvements have been especially pronounced among the lowest-scoring children. There, as in the UK, the most common explanations are Mississippi’s adoption of evidence-based classroom methods including teaching phonics at an early age, and its emphasis on accountability, from school rankings to requiring that children be capable readers before they progress.

Burn-Murdoch’s summary of the confluence of factors is apt.

In many countries, the past decade has seen a dangerous combination of weakening standards and reduced rigour in education. This has happened just as the rise of digital distractions and shortcuts has made these skills especially important for young people to develop the knowledge and abilities they will need in an uncertain future.

All this is critically relevant for developing countries like India. There is a widely held perception that Edtech tools, now supercharged by AI, can be transformative in overcoming large antecedent foundational literacy and numeracy deficiencies. On one side, this is reflected in the proliferation of Edtech platforms that are sold commercially and their extensive use in coaching for competitive entrance examinations. On the other hand, there is the increased use of digital equipment and Edtech solutions in public schools, including in primary schools. 

While there is at least some semblance of market testing (though its value may itself be questionable) in the case of the former, it is the latter that is vulnerable to the problems that the PISA scores highlight. 

The New Education Policy (NEP) 2020's technology chapter advocates using technology to improve education quality, expand access, and offer personalised learning experiences, and introducing AI and coding from Class 6 onwards. However, it does not say anything about AI-governance frameworks — clear rules on when/how AI is used, the role of teachers in mediating the use of Edtech, no emotional-companion framing for children, and no evidence generation beforewide deployment. They say nothing about generative-AI use inside classrooms, screen-time limits, or the phone-ban-style rules that are now becoming the norm across the West. This is a big gap that must be filled at the soonest. 

On the pedagogy, India dallied with the failing model before reverting to the boring conventional approach. First, the Right to Education Act had the controversial no-detention policy, which soon became politically appealing. Then the New Education Policy advocated several features of the progressive approach - competency-based assessment, reduced rote learning, “joyful” and flexible learning, holistic progress cards. 

Fortunately, the operationalisation of the Foundational Literacy and Numeracy (FLN) program, NIPUN Bharat, has been more conventional in hard, timeline-based targeting of every child attaining foundational literacy and numeracy by the end of Grade 3. The decision in December 2024 to roll back the no-detention policy for Classes 5 and 8 is another step in the right direction. Interestingly, the ASER 2024 recorded the first broad-based improvement in rural reading and math in two decades, most likely an outcome of the FLN focus rather than any technology push.

Finally, the success of countries like the UK and the US states like Mississipi highlight the importance of doing the basics right. Mississippi and other southern states focused on reading, curriculum coverage, standardised tests, holding back children scoring in the lowest level at the end of third grade, remedial instruction, teacher and administrator trainings, and parental engagement. The UK did “rigorous exams, tough inspections and fact-filled curriculums”. 

Interestingly, in all the several articles I have come across about these successes, I have struggled to find any mention of Edtech as a contributor. This tallies with Lant Pritchett’s four part smell test on the relevance of development interventions, and his argument that “none of the high performing educational systems in the world achieved their baseline greatness or resolved their learning crises through Edtech”. Instead, they focused exceptionally well on ensuring every child learns to read and do basic math early, aligning curriculum with actual student learning levels rather than overambitious and elitist standards, and supporting teacher capability, motivation, and practical accountability. 

India’s focus on FLN is an important first step. But it must be implemented with rigour and quality, and sustained. This must be complemented with teacher capability development, building school management and leadership capabilities, and parental and school accountability. These are boring and hard stuff, where quality is of essence, and also demands long-drawn and persistent struggle.

As I have blogged here and here, Edtech, while useful to some limited extent, may actually be becoming a big distraction. It may be distracting both the policymakers from making the correct choices and implementers from putting in the hard yards on persistent engagement on the basics. It may also be distracting teachers from focusing on their core work. 

I will argue that if school systems in India put in even a fraction of the efforts and resources it is putting into Edtech on improving teacher capabilities and school leadership through training and coaching, the results could have been transformational. We need a single-minded focus on these, including the adoption of innovative approaches, if we are to achieve significant improvements in learning outcomes.

A detailed and practical agenda for school education reform is laid out here.