India's Path to Development: Unlocking Capital Through a $559 Billion Corporate Bond Market India, already the fastest-growing major economy, is setting ambitious goals to become a developed nation, but achieving this vision hinges on expanding access to capital.
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India, already the fastest-growing major economy, is setting ambitious goals to become a developed nation, but achieving this vision hinges on expanding access to capital. A key challenge lies in its corporate bond market, which, at 47 trillion rupees ($559 billion), remains one of the world's smallest in proportion to GDP, accounting for only 16%. Despite its growth, this underdeveloped market constraints India's push for major infrastructure and economic expansion.
Bankers in Mumbai believe doubling this bond-to-GDP ratio is crucial to help finance the government's target of a $5 trillion economy within the next few years. However, strict regulations hinder long-term investors like insurers and pension funds from pouring money into infrastructure projects. Currently, Indian laws restrict these institutions from investing in bonds rated below AA, labeling them too risky in a relatively small market. This limitation has slowed progress in funding crucial infrastructure projects, many of which carry lower credit ratings.
According to the National Stock Exchange of India, capital expenditure on infrastructure such as roads, ports, and bridges is expected to reach 110 trillion rupees ($1.3 trillion) from 2023 to 2027, a 70% jump compared to the previous five years. Yet, the corporate bond market will only cover about one-sixth of that amount. Many companies, including Larsen & Toubro Ltd., India's leading engineering firm, have primarily relied on internal cash and bank loans, rather than tapping into the bond market for funding.
As India's economy continues to expand, local and international lenders must offer diverse funding sources, including a more robust corporate bond market. The regulatory environment, which caps insurers' exposure to infrastructure assets, further complicates this. For instance, insurers cannot invest more than 20% of a project's cost, a rule some experts argue should be revised.
There have been positive developments in recent years, with regulatory bodies like SEBI introducing reforms to boost bond market liquidity and retail participation. These measures are designed to ease companies' reliance on bank loans, as India needs a diversified funding model to sustain its rapid growth.
Expanding the bond market is crucial for spreading credit risks and improving the economy's response to central bank policy shifts, making it a vital component of India's path toward becoming a developed nation.
