According to the 'principle of increasing risk' in corporate finance, which of the following best describes the relationship between firm size and cost of credit?

Smaller firms face rising cost curves sooner because they have less own capital to leverage.

The cost of credit remains constant regardless of the firm's capital structure.

Interest costs are irrelevant for all firms when the economy is in a growth phase.

Larger firms face higher interest costs due to market saturation.

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19 August 2026

Decline in corporate investment in India

The topic addresses a critical structural issue in the Indian economy regarding corporate investment trends, which is a core component of the GS3 syllabus on growth, development, and investment models.

Notes

Corporate investment as a share of GDP in India has shown a persistent decline since 2016.
Investment peaked in 2004 (rising from 6.5% to 10.3%) and saw a revival post-Global Financial Crisis (GFC) until 2016.
Three primary determinants of corporate investment: expected profitability, confidence in future profit predictions ('animal spirits'), and the cost of credit.
Economies of scale imply that larger firms generally achieve higher profit rates, though they face market-share constraints.
The 'principle of increasing risk' (Michal Kalecki) suggests that the cost of credit rises as firms take on more debt relative to their own capital, disproportionately affecting smaller firms.
Small firms are often credit-constrained, while large firms are typically limited by market demand rather than finance.
Policy interventions like corporate tax cuts (e.g., 2018 reduction from 30% to 22%) and low-interest-rate regimes have had limited impact on reviving corporate investment.
Autonomous government expenditure is identified as a potential stimulus to shift the profitability curve outward and boost investment across firm sizes.

Questions

Analyze the structural factors influencing corporate investment in India. Why have supply-side interventions like corporate tax cuts and low-interest-rate regimes shown limited efficacy in stimulating private capital formation? 150 words

Attempt this — 150 words in 8 min

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Discuss the 'principle of increasing risk' in the context of Indian manufacturing. How does firm size create asymmetry in access to credit and investment capacity, and what role can fiscal policy play in addressing this stagnation? 250 words

Attempt this — 250 words in 11 min

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Prelims

According to the 'principle of increasing risk' in corporate finance, which of the following best describes the relationship between firm size and cost of credit?

Syllabus

Topics

Sources

What drives corporate investment?

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