The Economic Multiplier of Domestic Alternatives in India

When policymakers talk about mobilising domestic savings, the conversation often stops at the surface. More deposits, higher insurance penetration, bigger pension pools. But the question of where those savings are deployed is just as important as how much is collected.

India’s contractual savings system, from insurance premiums to pension contributions, already channels trillions of rupees into the economy. Yet most of this capital ends up in government securities, high-grade corporate bonds, or listed equities. These are safe, but they are also saturated. The marginal rupee parked here has a diminishing impact on both returns and the broader economy.

By contrast, capital allocated to alternatives, including private equity, venture capital, infrastructure, and other unlisted strategies, does something different. It doesn’t just fund companies; it builds capacity, creates jobs, and drives productivity growth. And the impact is measurable.

The IVCA Data

The Indian Venture and Alternate Capital Association (IVCA) has quantified this multiplier effect. According to their research:

• Every $10 million invested in alternatives generates $58 million in revenue, indicating a 5.8x output multiplier.
• That same investment creates 270 jobs, many in high-skill, high-productivity segments.

This is not a marketing line from fund managers. It’s backed by real-economy linkages:

• Infrastructure AIFs fund roads, renewable energy projects, and logistics networks, which employ thousands directly and improve efficiency across industries.
• Venture capital funds back technology platforms and companies that scale nationally, adding skilled jobs in engineering, marketing, and operations.
• Private equity funds professionalise mid-sized businesses, enabling them to expand into new markets, upgrade technology, and train larger workforces.

Why Alternatives Have a Higher Economic Multiplier

Listed equities and bonds are essential, but they are often transactions where one investor is selling to another. IPOs and bond issuances do channel fresh capital to companies, and in some cases at meaningful scale. But these events are relatively infrequent, especially compared to the steady, large-ticket deployments that private markets can deliver.

Alternatives work differently:

• Primary capital injections: Most AIF investments are directly into businesses or projects, expanding capacity by bringing in fresh capital.
• Long-term horizons: Private funds typically have 7–10-year cycles, meaning capital stays in productive use longer before seeking liquidity.
• Hands-on value creation: Fund managers don’t just write cheques, they bring governance, strategy, and operational improvements.

These characteristics amplify the multiplier effect. The rupee invested is not just money changing hands; it’s a growth catalyst.

The Missing Domestic Link

Despite this impact, the bulk of India’s alternative investment capital comes from overseas LPs. Domestic institutional participation, including from insurance companies, pension funds, provident funds, is negligible in comparison.

The result?
A large share of the economic and financial returns from India’s high-growth private market activity accrues to foreign investors. Domestic institutions get left with the safe, low-yield segments of the portfolio, while missing the illiquidity premium and the developmental impact.

Enter SEBI’s LVF Reforms

The recent SEBI proposal to lower the Large Value Fund (LVF) minimum from ₹70 crore to ₹25 crore, remove investor caps, and relax compliance requirements is a direct nudge to domestic capital to step into the alternatives arena.

Here’s why:

• Lower entry point: Insurance and pension funds constrained by per-investment limits can now participate without breaching exposure caps.
• Operational ease: Exemptions from the standard PPM template reduce administrative friction for both fund managers and investors.
• Scalability: Removing the 1,000-investor cap makes large pooled structures more viable.

If even a fraction of India’s domestic institutional capital reallocated toward alternatives, the economic multiplier effect could expand dramatically.

Sector-Level Impact of Scaling Domestic Alternatives

1. Infrastructure
   • Capital-intensive projects like roads, ports, and renewable energy require patient capital.
   • Domestic LVF pools can co-invest alongside sovereign funds, reducing dependence on overseas anchor investors.
   • Infrastructure’s multiplier effect extends far beyond construction. It lowers logistics costs, improves market access, and boosts global competitiveness.
2. Technology and Innovation
   • Venture and growth equity in SaaS, fintech, AI, and deep tech can transform India from a services hub to a product powerhouse.
   • These sectors create high-productivity jobs and generate export revenues.
3. Healthcare
   • Private equity-backed hospital chains, medtech companies, and pharmaceutical ventures improve access, upgrade technology, and create skilled employment.
   • The pandemic underscored healthcare as a strategic sector, but scaling it needs long-duration risk capital.
4. SME Growth
   • India’s mid-market businesses are often too big for microfinance but too small for the capital markets.
   • Private capital can help them professionalise, expand operations, and integrate into global supply chains.

Capital Market Depth as a Secondary Benefit

Domestic alternatives don’t just affect the real economy; they strengthen the capital market itself:

• More exit routes: A vibrant AIF ecosystem eventually feeds the IPO pipeline, adding quality listings.
• Stability through the cycles: Domestic LPs can sustain funding during global downturns, smoothing capital availability.
• Institutionalisation of governance: Alternatives often enforce higher ESG and reporting standards, which cascade through the market.

The deeper and more diverse the capital base, the less vulnerable India becomes to foreign capital flight or currency shocks.

From Trickle to Flow: What Could Unlock Scale

While SEBI’s LVF reforms are a catalyst, they are not sufficient on their own. Three parallel shifts are needed:

1. Regulatory Permission
   • Insurance and pension fund guidelines must explicitly allow AIF investments, with risk-based caps instead of blanket prohibitions.
   • Current norms that treat all AIF categories alike, regardless of underlying asset class or credit quality, need nuance.
2. Internal Capability Building
   • Domestic LPs need teams capable of conducting due diligence on private market strategies, monitoring investments, and managing illiquidity risk.
   • Partnering with experienced external advisors can accelerate this process.
3. Manager Readiness
   • Fund managers would need to design products that suit institutional needs, including fee structures, reporting standards, and governance frameworks that match global LP expectations.

The Cost of Inaction

If domestic institutions remain on the sidelines, the pattern will continue:
Foreign LPs reap the illiquidity premium, and India’s private market development remains dependent on offshore sentiment. The multiplier effect in terms of jobs, GDP, and sectoral transformation will still occur, but the financial upside will leak overseas.

In an economy that needs to create millions of jobs annually and upgrade its infrastructure and innovation base, leaving domestic capital idle in low-yield instruments is an economic inefficiency.

The Multiplier Is Real, and It’s Ours to Claim

India’s alternatives industry has proven its ability to generate outsized economic impact. The data is clear: a rupee invested here does more for GDP and employment than in most other asset classes.

What’s missing is scale and that scale can only come from domestic institutions with the capacity for large, patient, and long-term commitments. SEBI’s LVF reforms create a window for this shift. If policy, capability, and intent align, the multiplier effect could go from a promising statistic to a central pillar of India’s growth model.

The choice is stark: watch the multiplier benefit flow to offshore investors, or claim it as a national economic asset.