The Reserve Bank of India’s announcement to inject ₹1.25 lakh crore of liquidity into the financial system has been hailed in official circles as a stabilising measure, a necessary infusion to ease credit conditions and support growth. Yet beneath the veneer of technocratic reassurance lies a more troubling reality: liquidity injections in India have increasingly become instruments of corporate balance sheet repair rather than engines of inclusive economic expansion. The debate is not about whether liquidity matters—it does—but about who benefits, and whether the architecture of policy has systematically excluded the very enterprises and citizens whose resilience sustains the economy.
The government’s redefinition of MSMEs, raising the investment threshold up to ₹500 crore, was presented as a reform to broaden eligibility and attract larger players into the fold. In practice, it diluted the category to such an extent that the original micro and small enterprises—the kirana shops, the small manufacturers, the local service providers—were crowded out. The very nomenclature of “MSME” has been hollowed, transformed into a vehicle for politically connected corporates to access concessions, subsidies, and credit guarantees. Data from the Ministry of MSME shows that while registered units have increased, credit disbursal has disproportionately tilted towards medium-sized firms, with micro enterprises receiving less than 15% of formal credit flows in FY25. This structural distortion raises the first question: when RBI injects liquidity, is it truly lubricating the veins of grassroots enterprise, or merely fattening the arteries of corporate India?
Liquidity injections are supposed to ease systemic stress, reduce interest rates, and expand credit availability. But the Indian banking system’s recent history is littered with episodes where incremental liquidity has been absorbed by large borrowers, often politically favoured, while smaller firms remain starved. The Financial Stability Report of December 2025 noted that gross NPAs had declined to 2.6%, but MSME loan recovery rates were stuck at 70%, reflecting persistent fragility. Banks, wary of risk, prefer lending to corporates with implicit sovereign backing rather than to small entrepreneurs whose cash flows are volatile. The result is a paradox: liquidity is abundant in aggregate, but scarce in practice for those who need it most.
The second question is equally pressing: even if banks’ balance sheets improve, does this translate into meaningful relief for the common citizen? The record suggests otherwise. Corporate loan write-offs have ballooned, with RBI data showing that banks wrote off over ₹10 lakh crore between FY16 and FY25, much of it concentrated among large borrowers. Simultaneously, retail borrowers face relentless recovery action for small defaults. Liquidity injections, therefore, risk becoming subsidies for corporate delinquency rather than instruments of household security. The political economy of this asymmetry is stark: the government’s allies in industry reap the benefits, while the middle class and small entrepreneurs bear the costs of fiscal tightening, inflation, and stagnant wages.
Experts have not been silent. Former RBI Governor Raghuram Rajan warned at Davos that “tax cuts and liquidity injections cannot substitute for effective public spending and human capital investment; otherwise fiscal deficits will metastasize into a debt bomb.” His critique underscores the futility of relying on liquidity as a panacea. Without structural reforms—investment in education, healthcare, skilling, and genuine MSME support—liquidity injections are akin to pouring water into a leaking vessel. Economist Arun Kumar has similarly pointed out that despite ₹1.97 lakh crore spent on the Production Linked Incentive scheme, employment creation has been under 10 lakh, a fraction of the promise. Liquidity, in this context, is not translating into jobs or incomes; it is translating into corporate margins and stock market buoyancy.
The macroeconomic backdrop compounds the scepticism. India’s GDP growth in Q2 FY26 was reported at 8.2%, yet manufacturing growth was a paltry 2.1%. Employment elasticity has collapsed, meaning output growth does not generate proportional jobs. Labour force participation remains stuck at 56.1%, with youth unemployment in urban areas at 6.7%. These figures reveal the hollowness of headline growth. Liquidity injections may stabilise financial markets, but they do not alter the structural reality of jobless growth. For the citizen who voted for stability and security, the question is not whether GDP expands but whether livelihoods expand.
The fiscal dimension is equally fraught. The government has targeted a fiscal deficit of 4.4%, but combined central and state deficits hover around 8-9%. Heavy borrowing crowds out private investment, keeping interest rates elevated despite RBI’s liquidity operations. This contradiction means that liquidity injections are constantly offset by fiscal profligacy. The middle class, already burdened with direct taxation, finds itself financing both the deficit and the liquidity cycle, with little tangible return.
The debate, therefore, must confront the political economy head-on. Liquidity injections are not neutral technocratic acts; they are distributive choices. When MSME definitions are stretched to include firms with investments up to ₹500 crore, the distributive choice is clear: concessions flow to corporates, not to micro enterprises. When loan write-offs disproportionately benefit large borrowers, the distributive choice is clear: relief flows upward, not downward. When liquidity injections stabilise markets but fail to generate jobs, the distributive choice is clear: optics triumph over substance.
The citizen’s scepticism is justified. Why should one believe that RBI’s ₹1.25 lakh crore injection will trickle down to the common man when past injections have not? Why should one accept that banks will lend to small entrepreneurs when their risk aversion and political incentives push them towards corporates? Why should one trust that liquidity will generate jobs when manufacturing growth remains anaemic and employment elasticity broken? These are not rhetorical questions; they are empirical realities borne out by data.
The defenders of liquidity argue that without such injections, systemic stress would worsen, credit markets would freeze, and growth would falter. This is true in a narrow sense. But the broader truth is that liquidity injections without structural reforms are palliatives, not cures. They stabilise symptoms but do not heal causes. For India’s economy to genuinely benefit, liquidity must be accompanied by targeted MSME credit lines, genuine dispute resolution mechanisms, and fiscal discipline that prioritises human capital investment over corporate concessions.
Budget 2026 will be a litmus test. If liquidity injections are once again deployed as headline measures while MSMEs languish and corporates prosper, the trust deficit between citizen and state will deepen. The middle class, whose taxes finance these cycles, will continue to feel excluded from the dividends of growth. The government’s credibility will hinge not on the quantum of liquidity but on the quality of its distribution.
In the end, liquidity is a means, not an end. Its purpose is to enable productive investment, job creation, and household security. If it becomes a mechanism for corporate bailouts and political patronage, it ceases to serve the economy and begins to serve only the elite. The RBI’s ₹1.25 lakh crore injection, therefore, is not just a financial operation—it is a test of India’s economic morality. Will it nourish the roots of enterprise, or will it water only the branches of privilege? The answer will determine whether India’s growth story remains a mirage or becomes a reality.