Debt’s the way

EDITORIAL

A country requires both a healthy capital market and a liquid debt market for vibrant economic growth. India has had the first for a long time. But it has lagged in developing a liquid debt market in the absence of significant retail participation. A large part of the blame for this can be placed on past policies that have limited retail investor interest in debt instruments. The only debt product known to Indian investors was bank fixed deposit. Though some relaxations have been made in the recent past to encourage retail participation in the debt market, it has been a case of too little too late. Be that as it may, it is high time policymakers appreciated that Indian investors have matured and now is the time to develop the retail debt market even if that comes at the cost of loss of revenue to the government in the initial years. International experience suggests that debt markets tend to overtake equity markets in terms of volumes and the number of participants sooner than rather than later. This can have an extremely positive impact on the economy in the long term. The response to recent bond issues from the National Highway Authority of India and other state-owned companies reveals that there is no dearth of demand for good debt products in India. Their huge oversubscription clearly indicates that Indian retail investors have an appetite for such instruments if they are assured of safety of capital, guaranteed by the government in such cases. Other than the attractive interest rates offered, such bond issues also attract investor interest because the government of India remains the major shareholder in these companies. Another good reason for the success of these issues is the fact that these bonds can be traded on the stock exchange and investors enjoy the freedom to sell as and when they wish to do so. While it is true that some bonds issued by certain banks that are trading on stock exchanges do not offer high liquidity, the very fact that they are listed is a big help, as investors are no longer forced to retain them till the end of maturity and instead trade them off on the stock exchange. The problem of low liquidity can be resolved by offering good financial incentives to investors. If the government can allow tax incentives on public sector bonds, it can certainly give similar or other incentives on private sector bonds as well. Further, there is need for awareness campaigns to attract investors to the retail debt market. A liquid debt market can be good for all stakeholders — the government, companies and investors. Once the market develops adequate liquidity, companies will find it attractive to raise loans from the domestic market, instead of rushing overseas and exposing themselves to currency risks. Today, overseas borrowing may be justified, given the interest differential, but the advantage may not last forever. Even for the government, which stopped products such as the RBI bonds, a vibrant retail debt market can facilitate the launch of similar other products to help raise resources for long gestation projects. To make that happen, the regulator should initially allow plain vanilla products. Complex products should only be allowed after the investors establish faith in the market and participation reaches critical mass.