[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

MORE MARKETS, LESS GOVERNMENT
of the government bonds leads banks to
include even greater percentage of government
bonds in their portfolio than the
prescribed SRL of 25 percent. Government
and Reserve Bank of India introduced
many structural changes to improve
transparency in the market
dealings, method of primary auctions, allowing
Primary Dealers, borrowings at
market determined rates, and creating
technology platforms like NDS to recognize
the institutional characteristics of
the market. The same kind of impetus
has been lacking in the Indian corporate
bond markets and as a result of this, major
source of corporate funding is all but
non-existent.
The corporate bond market, in the
sense of raising debt through public issuance
in capital market, is shadowed by
growing equity market and government
bond market and was less than 2 percent
of Indian GDP in 2004 compared to 50
percent in Singapore,68 percent in South
Korea, and 143 percent in USA (IMF,
2004). A well developed corporate bond
market facilitates the firms operating in
the economy to devise their optimum for Indian debt capital markets”,
capital structure and investors to have (Nov,2007), predicts that Indian bond
better spectrum of asset classes to 160
hedge and diversify their fixed income
risks. The share of corporate
140
Government Debt
bonds in the total bond issued has 120
also decreased from 34 percent in
Corporate Debt
100
1999-00 to a 29 percent in 2003-
80
04. The weak status of corporate
bond market was mainly due to 60
dominance of government securities
and structure of the market
itself where government was borrowing
at pre-decided coupon
rates from a group of investors
such as banks. The public sector
Debt As Percentage Of GDP
40
20
undertakings (PSUs) have persistently
overshadowed the private sector bond issuance
over the years. Corporate debt
can be raised either by private placement
or public issue. Private placement is preferred
owing to the regulatory processes,
higher cost associated with public issuance,
and enormous hurdles in public issues
process in the form of various types
of disclosure, registration requisites etc
(NSE, 2005).These reasons have also incentivized
the corporate to raise debt
from abroad because of lesser listing and
disclosure requirements, lower cost, and
better liquidity in secondary market.
Debt raised abroad increased around two
and a half times from 2001 to 2005 equivalent
to 60 percent of corporate issuance
in domestic debt market (NSE, 2005).
The latest report by the Goldman Sachs
titled, “ Bonding the BRICs: Big chance
0
market is going to grow fourfold and
reach to the level of $1.5 trillion by 2016.
It also reports that the corporate bond
market will annually grow by around 28
percent from $100 billion to $575 billion
in 2016.Such a high benchmark (required
growth of 28 percent) when contrasted
with almost non-existent growth rate of
the corporate bond market (historically)
raises a big concern for policy makers and
According to Goldman Sachs, Indian bond market is going
to grow fourfold and reach to the level of $1.5 trillion by
2016. The corporate bond market will annually grow by
around 28 % from $100 billion to $575 billion in 2016
India
China
Korea
Malaysia
Singapore
USA
market participants equally. A robust
policy framework together with a performance
based regulatory approach is
urgently required to push the market to a
higher growth and market friendly frontier.
The booming economy, growing
populations, and rising household income
are exerting huge demand for infrastructure
services. The inability to meet such
a fast growing demand has become more
visible in recent past and evident by congestion
on the roads, airports, ports, frequent
electricity cut etc. There is no way
India can take its infrastructure requirement
for granted if it aims to
traverse the sustainable growth trajectory.
The government officials estimate
the infrastructure requirement
of about $500 billion in next five
years. It is also expected that about 40
percent of the fund will be infused by
the private sector. Considering the
long term irreversible nature of infrastructure
investment and short to
medium term liabilities of banks, long
term financing in the form of debt is
widely accepted as the most appropri-
THE INDIA ECONOMY REVIEW
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