Prasanna Tantri, associate professor at the Indian School of Business, proposes shifting government risk support from debt guarantees to equity backing for start-ups to foster innovation and bridge India’s ‘missing middle’, while warning of potential fiscal and market risks.
Prasanna Tantri, an associate professor of finance at the Indian School of Business, has argued that if the state is prepared to absorb risk, it should do so by backing innovative start-ups rather than by subsidising debt. Writing in posts on X, Tantri said the next time governments and regulators are willing to take a financial gamble, they should consider guaranteeing part of the equity invested in new and smaller firms. He said debt guarantees are a poor fit for ventures whose returns are uncertain and which may not be able to meet fixed repayment schedules.
Tantri acknowledged that such a model would still expose taxpayers to losses. Even so, he said the public cost would likely be lower than the burden created by the NRI subsidy framework, while the upside could be much larger. According to his argument, equity support for start-ups could encourage innovation, capital formation and employment, while also helping to bridge India’s persistent “missing middle” problem, the gap between tiny businesses and larger, bankable companies.
He also rejected the idea that the government should take board seats in such firms. In response to a user on X, Tantri said that would be a “Bad idea sir in my view. Give a guarantee and have a team of respected corporate leaders manage the funds under the guarantee. SIDBI type plan also does not work where government tries to invest. Just follow this NRI model. Instead of offering subsidies to NRIs, offer it to start ups.”
Tantri’s latest comments follow earlier criticism of the Reserve Bank of India’s FCNR(B) measures, which were designed to support the rupee by drawing in foreign currency inflows. He has said the approach, along with external commercial borrowings and other dollar-denominated funding, mobilised roughly $136 billion and could push India’s external debt from about $765 billion to nearly $900 billion. He has also warned that the move left the banking system with excess liquidity.
In his earlier analysis, Tantri set out five major risks from the strategy, including the chance of clustered outflows if large volumes of borrowed dollars have to be repaid around the same time. He said the direct cost of any exchange-rate guarantee might remain manageable even if the rupee weakens further, but the larger danger would be a market reaction before maturities fall due. In his view, a worsening geopolitical backdrop years from now could make those scheduled outflows a serious strain on the currency. He said the right test is whether a decision made before the outcome is known was worth taking at all.
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