Emerging Sectors Drive India Capital Growth Despite Lending Hurdles

Emerging sectors like AI and defence are driving India's investment growth, yet traditional bank lending remains restricted due to technology obsolescence risks and long capital recovery cycles, requiring specialized financing strategies.

Investment Trends in Emerging Indian Sectors

Despite rising investments across emerging sectors like AI and space technology, bank and non-banking financial company (NBFC) lending remains limited, as per a report by Union Bank of India. According to the report, emerging sectors such as AI, semiconductors, defence and green hydrogen are attracting massive investments. “AI, semiconductors and defence each carry over Rs 5 lakh crore of announced public and private investment,” it said. However, banks may not be the primary financiers of all these projects, as financing patterns vary significantly across sectors, with debt financing dominating manufacturing and power projects “while AI and space stay equity-funded.”

Risks and Challenges for Financial Institutions

Noting that “Technology obsolescence is the top risk,” it highlighted, “chip nodes shift every 3–5 years and GPUs refresh every 18–24 months.” At the same time, the lending sector faces offtake and payment risks due to “few bankable hydrogen buyers, discom delays in renewables and long MoD (Ministry of Defence) payment cycles.” At the same time, investment recovery periods range from five to eight years in semiconductors and seven to ten years in space, often exceeding typical loan tenors.

Proposed Financing Solutions

As per the report, banks should establish specialised financing desks for semiconductors, hydrogen, data centres and battery storage. It also suggested milestone-linked disbursements, receivables securitisation, order-book and TReDS financing, equipment leasing and green loans. Going forward, “Over 3–5 years, demand shifts to storage, ATMP, offtake-linked hydrogen, edge data centres and the defence MSME tier,” it noted.

Capital Expenditure Growth Forecast

Apart from this, 12 emerging sectors, led by artificial intelligence (AI), semiconductors and defence, are expected to drive India's next phase of capital expenditure growth, supported by government schemes and rising private investments. AI leads with around Rs 5.9 lakh crore in disclosed public and private investments, followed by semiconductors at Rs 5.27 lakh crore and defence at Rs 5.07 lakh crore. Biotechnology and green hydrogen are also emerging as major investment destinations, it noted.

The report noted that private companies and global hyperscalers have pledged over USD 400 billion towards AI and data-centre infrastructure, while the semiconductor sector is targeting Rs 4 lakh crore in private investments between 2026 and 2032. “Banks can lead with milestone-linked, receivables-backed and leasing products, backed by specialist sector desks,” it said.

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