The debt imperative

At a time when equity is being worshipped by an increasing number of common people in the country, principal economic adviser to the Union ministry of finance, Sanjeev Sanyal, has said equity alone cannot sustain growth and stronger debt markets are needed. Nothing can be closer to truth. On a more fundamental level, credit has driven growth when the cult of equity was almost absent in this country. The growth in China, too, was fuelled by rapid expansion of bank credit. Debt has been the nanny who has taught toddler many economies to stand and walk on their own feet.

If India finds a place in one of the globally recognised bond indices next year as indicated by Morgan Stanley, it might be a shot in the arm for the debt market in the country. Historically, an overwhelming fraction of private assets have been created with debt capital in India. Almost the entire history of economic growth in India — the creeping growth in the decades followed by the fast clip after the liberalisation — was fuelled by debt. More specifically debt provided by banks and state-run development financial institutions. Most companies fund their expansion plans through debt raised from institutions. A debt-equity ratio tilted in favour of debt has been a long-standing feature of the Indian private sector. While banks have fuelled a lot of growth, they need to do a lot more to step up the growth momentum for which post-pandemic India looks prepared. Though the investor discussion is dominated by the equity cult, raising equity is more cumbersome and time consuming.

A developed debt market facilitates the government, companies and individuals to raise funds. These funds help the country to build economic infrastructure such as roads, ports, bridges, power plants. To the vast multitude of citizens with low risk appetite, the debt market provides instruments to deposit their hard earned money which is channelised into long term funds for infrastructure. With less volatility and guaranteed returns, debt market instruments hold huge significance for the people even in the declining interest rate regime. In it not without reason that the government is trying to boost retail participation in the G-Sec market. Another market that needs to be developed in the country is the market for corporate bonds. The sooner these two sectors develop, the better it is for the economy.