US treasury secretary Henry Paulson happened to be in Mumbai on the day the Sensex rose above 20,000 for the first time.
Paulson’s attention on Tuesday, however, was focused on another Indian market, one that’s nowhere near equities in breadth, depth or innovation.
That market—for corporate bonds—is going to play a critical role in sustaining the fast growing Indian economy, and creating trade and investment opportunities for US businesses.
India needs to invest $475 billion (Rs18.7 trillion) between now and 2012 to ease shortages in roads, ports, power stations and subway systems. At the existing levels of investment, the country will miss the target by a staggering $162 billion.
So, where will the additional investments come from?
Although tax collections in India are buoyant, the government is frittering away the good times by spending money on populist causes—such as a rural job guarantee—that do nothing to build productive capacity in the economy.
Leaving infrastructure to the private sector is easier said than done. Sure enough, Blackstone Group and other private equity funds have begun to play an increasingly important role in bringing overseas risk capital into Indian infrastructure projects. There is, however, a limit on how much foreign money India can absorb and how quickly.
Ultimately, domestic capital has to take the lead.
And that’s where the absence of a functioning corporate bond market in India is a handicap.
About one-third of the total annual savings of India’s households, companies and the government routinely gets locked up in physical assets—such as gold jewellery—and isn’t available to the financial industry. Of the remaining, only between 15% and 20% goes into public works.
At least half of the country’s additional financial savings over the next five years must get channelled into infrastructure projects, a government-appointed committee had said in May.
This will require a huge effort.
The debt market, which could facilitate the flow of money from those who have tonnes of it—such as insurers—to where it’s most needed, is practically non-existent.
“Infrastructure investment requires long-term financing,” Paulson said at a conclave of executives in Mumbai on Tuesday.
“The development of corporate bond markets will provide opportunities for such long-term investment by insurance companies and pension funds.”
Agenda for change
Speaking at the same conference, India’s finance minister P. Chidambaram agreed that the fast growing economy had fallen behind in creating a functioning market for corporate borrowings.
Equity markets in India have come a long way in the past decade. Debt capital markets, by comparison, have been given short shrift by policymakers and regulators.
Withholding taxes and high duties on bond ownership documents ought to be removed. Corporate bonds aren’t eligible collateral in the interbank repurchase market. That needs to change.
There ought to be more opportunities for investors to hedge their risks. While equity derivatives in India are quite well developed, interest rate futures, introduced in 2003, are practically dead; credit-default swaps are only now making a hesitant entry.
Bank loans are six times bigger than the outstanding stock of Indian corporate bonds. And that isn’t at all surprising.
Mark-to-market norms push banks away from investing in corporate bonds and towards lending money to companies and individuals; state-owned life insurance companies don’t hold their mandated minimum of 15% of assets in infrastructure and social investments. They park their money in government securities.
It’s because the domestic bond market hasn’t been allowed to prosper that corporate issuers have practically abandoned it over the past few years, choosing instead to borrow overseas.
However, it doesn’t make sense to finance infrastructure companies in India directly with dollar debt when the revenue from such projects is almost entirely denominated in the local currency. Such foreign capital is best raised by local banks for long maturities and then lent domestically.
“We ought to be doing whatever we can to improve the market for corporate debt and rupee-denominated debt in order to be able to finance infrastructure,” said Montek Singh Ahluwalia, deputy chairman of the Planning Commission, India’s top economic planning agency.
Good intentions alone won’t suffice. It’s time to implement them.
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