INDIA MISSED THE MIDDLE...
INDIA MISSED THE MIDDLE
How India
changed the way it financed industrialisation — and why ₹10,000 crore is an
attempt to rebuild the bridge
FORENSIC
EDITION • 7 OCTOBER 2026 • BY
MURTHY ASR
HERO: IDBI • IFCI • ICICI — the institutional architecture at
the heart of India's development-finance story.
India did
not run out of entrepreneurs. It may have missed the middle.
The difficult journey is not starting a
company. It is scaling a successful small company into a medium, large and
globally competitive enterprise. India once had a specialised
development-finance architecture aimed at industrial scale-up. That architecture
was reshaped after 1991. Now, with a ₹10,000 crore SME Growth Fund, the
government is attempting to rebuild part of the bridge.
|
₹10,000 crore |
Direct equity |
The gap |
1. Before the Missing Middle, There Was a
Development-Finance Machine
India's post-Independence financial
architecture was deliberately built to channel long-term capital into
industrialisation. Institutions such as IDBI, IFCI and ICICI were part of that
system; at the state level, State Financial Corporations and State Industrial
Development Corporations extended the architecture into regional industry.
The important forensic point is not that
these institutions were giant venture-capital funds. They were predominantly
providers of long-term/project finance and industrial credit. But they formed
part of a wider ecosystem in which industrial enterprises could obtain capital
that ordinary commercial banking was not designed to provide.
That distinction matters. The old system
had serious weaknesses — directed lending, governance problems, poor risk
pricing and asset-quality stress. Yet it also represented an explicit
institutional answer to a problem that India still faces: how does a promising
enterprise finance the long, risky journey from small operation to industrial
scale?
2. The System Was Not Just About Big Industry
The historical record is more nuanced than
a simple 'DFIs financed big companies' narrative. State Financial Corporations
were created to provide medium- and long-term finance to industrial
undertakings, particularly businesses that were outside the normal comfort zone
of commercial banks. India also experimented with risk capital through
initiatives such as the National Equity Fund and venture-capital structures.
That does not mean the old system solved
the SME problem. It did not. But it means the institutional memory of
development finance was broader than today's conventional bank-loan model.
3. India Was Already Experimenting With Risk Capital
The late 1980s and early 1990s saw the
emergence of dedicated equity/risk-capital initiatives alongside traditional
development finance. The National Equity Fund was established in 1987, and
TDICI — created by ICICI and UTI in 1988 — became an early institutional
venture-capital vehicle.
So the policy problem was recognised before
liberalisation: some businesses needed risk-bearing capital, not just secured
debt. The unanswered question was how to scale that ecosystem after the
financial architecture itself changed.
4. Then 1991 Changed the Financial Equation
Economic liberalisation changed the role of
development finance. The early-1990s reforms progressively weakened the old
model of concessional, directed long-term funding. Traditional DFIs
increasingly had to compete for market-based resources and confront the same
asset-quality and profitability pressures as commercial financial institutions.
ICICI ultimately merged with ICICI Bank in
2002–03. IDBI became a bank in 2004. IFCI, meanwhile, struggled with impaired
assets and restructuring. At the state level, the SFC network became
increasingly marginal in the financial system.
This was not simply a policy mistake. The
old DFI model had real structural problems. The harder question is whether
India built a replacement that was equally effective at supplying
long-duration, growth-stage capital to the thousands of companies trying to
move up the scale ladder.
CHART: SME credit growth was much faster in the 1980s than in
the 1990s in the RBI historical comparison cited in this analysis.
5. The State-Level Network Became a Shadow of Its Former
Self
The decline was not confined to the
national institutions. RBI historical material shows how small the SFC network
had become relative to the financial system by the late 2000s. That matters
because state-level institutions were closest to regional industrial clusters —
precisely where many small and medium firms operate.
The result was an institutional gap:
commercial banks remained essential lenders, while private equity and venture
capital developed rapidly, but neither automatically reproduced the patient,
regionally distributed development-finance function once associated with the
old architecture.
6. China Reformed Too — But Kept a Policy-Finance Layer
China is a useful comparator, but not a
monocausal explanation for India's slower industrial transformation. China had
many advantages and policy choices: export orientation, manufacturing clusters,
infrastructure investment, FDI, labour-intensive industrialisation and
integration into global supply chains.
One institutional difference is
nevertheless striking. In 1994 China established three policy banks, including
China Development Bank. Commercial banks were pushed toward commercialisation
while a dedicated policy-finance layer remained available for infrastructure,
basic industries and regional development.
The defensible lesson is therefore not
'DFIs caused China's growth.' It is that China commercialised parts of its
banking system without eliminating a powerful policy-finance channel. India, by
contrast, progressively converted or weakened several of its major
development-finance institutions and never created an equally broad replacement
for growth-stage industrial finance.
7. What India May Have Missed
ORIGINAL BIZ MASALA GRAPHIC: the scale-up journey where the
financing gap can become most consequential.
India has no shortage of micro and small
enterprises. The harder economic challenge is turning a productive small
enterprise into a medium enterprise, then a large enterprise, then a globally
competitive company.
Debt alone can be too restrictive for this
journey because expansion raises leverage, collateral requirements and
repayment pressure. Equity can absorb risk and support investment in
technology, capacity, acquisitions and international expansion. That is why the
government's new emphasis on direct equity is more significant than the
headline ₹10,000 crore alone.
8. 2026: India Tries Again
On 6 October 2026, the Union Cabinet
approved a ₹10,000 crore government commitment toward establishing the SME
Growth Fund. The official design calls for direct equity investment in viable
and scalable small and medium enterprises, with a majority allocation intended
for small and medium manufacturing enterprises.
The stated sectors extend beyond
traditional manufacturing to services, technology, innovation-driven businesses
and strategic value chains. The policy also identifies capacity expansion,
advanced technology, international-market entry, global value-chain
participation, acquisitions and strategic investments as potential uses of
capital.
The fund is also meant to look beyond the
largest industrial centres, including industrial clusters in Tier-II and
Tier-III cities.
9. ₹10,000 Crore — How Far Does It Go?
ILLUSTRATIVE ONLY: ticket-size arithmetic shows why the
structure, recycling and private co-investment matter as much as the headline
corpus.
A ₹10,000 crore public commitment is
meaningful, but its eventual economic impact cannot be inferred from the
headline number. The key variables are ticket size, ownership stakes, private
co-investment, fund recycling, investment period and exit discipline.
For example, if the capital were divided
into very large tickets, the number of direct beneficiaries would be small. If
tickets were much smaller, the fund could reach more companies but would need a
different portfolio and governance model. Neither approach is automatically
superior.
10. The Three-Pillar Rebuild
The SME policy architecture announced in
the 2026 Budget is broader than the Growth Fund. It combines equity support,
liquidity support and professional support.
|
EQUITY |
LIQUIDITY |
PROFESSIONAL SUPPORT |
|
₹10,000 crore SME Growth Fund + ₹2,000 crore SRI top-up |
TReDS expansion, CPSE settlement platform, CGTMSE invoice
discounting and related market infrastructure |
Corporate Mitras in Tier-II and Tier-III towns |
11. The Forensic Questions the Government Has Yet to
Answer
·
Who will manage the fund, and
under what governance framework?
·
What will be the minimum and
maximum investment ticket?
·
How much private capital will
be crowded in alongside the public commitment?
·
How will eligibility
distinguish scalable SMEs from businesses that are simply seeking rescue
capital?
·
How will valuation, ownership,
board rights and conflicts of interest be handled?
·
What is the investment period,
fund tenure and exit mechanism?
·
When will the first investments
actually reach companies?
·
How will success be measured —
jobs, exports, productivity, market share, survival, or financial returns?
12. Biz Masala Champion Scorecard
|
TEST |
WHY IT MATTERS |
WHAT SUCCESS WOULD LOOK LIKE |
|
Scale |
Companies must cross the small-to-medium barrier |
More firms graduating into medium/large scale |
|
Productivity |
Capital should fund technology and capacity |
Higher output per worker / better margins |
|
Exports |
Global supply chains are a major opportunity |
More Indian SMEs becoming exporters |
|
Geography |
Growth should not remain concentrated in metros |
Tier-II/III clusters produce champions |
|
Additionality |
Public money should unlock capital unavailable otherwise |
Private co-investment and follow-on funding |
|
Returns |
A revolving equity model needs discipline |
Realisations recycle capital into new firms |
13. What We Can — and Cannot — Say About China
We can say that China's financial
architecture retained dedicated policy banks after banking reforms, and that
China Development Bank became an important channel for long-term policy
finance. We cannot say that this single institutional difference explains
China's spectacular growth.
The stronger conclusion is narrower:
development finance is one part of an industrial strategy. If a country wants
companies to scale rapidly, it needs mechanisms that can finance long-duration
investment, infrastructure, technology and strategic expansion when ordinary
commercial credit or early-stage venture capital is insufficient.
14. The Real Test Starts After the Announcement
The ₹10,000 crore commitment is not the
outcome. It is the beginning of an experiment. The real test is whether a
company that today sits between bankability and institutional-investor scale
can obtain enough patient capital to make the next leap.
That is why the most important metric may
not be the amount committed by government. It may be the number of companies
that graduate because the capital existed at precisely the point when
conventional finance stopped being enough.
THE BIZ MASALA VERDICT
India did
not miss the entrepreneurs. It may have missed the middle.
For decades, India's financial system
evolved from a development-finance model toward a more market-oriented banking
and capital-market structure. That transition solved real problems, but it also
left a question that has never fully disappeared: who finances the risky middle
stage of industrial growth?
The SME Growth Fund is an attempt to answer
that question with equity rather than another credit line. Its success will
depend less on the announcement and more on execution — selection, governance,
ticket sizes, private capital mobilisation, follow-on funding and exits.
If it works, ₹10,000 crore could become
more than a fund. It could become a bridge. If it does not, India will still
have millions of entrepreneurs — and the same missing middle.
SOURCE & METHODOLOGY NOTE
This story separates official policy
announcements from historical interpretation. The ₹10,000 crore SGF commitment
and its stated objectives are based on Government of India / PIB and Budget
documents. Historical discussion of DFIs, SFCs and SME credit growth draws on
RBI historical material and official policy records. China comparison is used
as institutional context, not as a claim of single-cause causality.
·
PIB — Cabinet approves ₹10,000
crore commitment toward establishment of SME Growth Fund (6 Oct 2026):
https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=2319532&lang=2®=48
·
PM India — SME Growth Fund
announcement:
https://www.pmindia.gov.in/en/news_updates/cabinet-approves-commitment-of-rs-10000-crore-towards-establishment-of-the-sme-growth-fund-for-direct-equity-investments-in-small-and-medium-enterprises-to-create-future-champions/
·
MSME Dashboard:
https://dashboard.msme.gov.in/?form=mg0av3
·
Union Budget 2026 documents:
https://www.indiabudget.gov.in/doc/bh1.pdf
·
PIB — Economic Survey 2025-26 /
MSME contribution:
https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=2219984&lang=2®=48
·
PIB — Budget 2026 MSME measures:
https://www.pib.gov.in/PressReleasePage.aspx?PRID=2228306&lang=1®=6
VISUAL NOTE
The hero uses the three photographs
supplied in this conversation: IDBI, IFCI and ICICI. The analytical charts and
graphics are original Biz Masala graphics prepared for this edition.
Documentary photographs supplied by the user are reproduced as supplied; no
claim is made here that they represent the original historical headquarters or
the institution's condition at any particular date.
BIZ MASALA — VISUAL INVENTORY
·
Hero: IDBI • IFCI • ICICI
supplied photographs, composited into a 16:9 documentary cover.
·
Original chart: SME credit
growth comparison (1980s vs 1990s).
·
Original graphic: the Missing
Middle scale-up ladder.
·
Original graphic: ₹10,000 crore
deployment scenarios.
·
Original tables: three-pillar
SME support architecture and Champion Scorecard.
·
Logo: Biz Masala logo placed
inside the story, not above the main header.
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