Economic Survey 2024-25: Corporate Debt Market Under-Capitalised Amid Liquidity Issues

Chief Economic Adviser (CEA) pointed out that India’s corporate debt market continues to be under-capitalized, especially when compared to global counterparts. Despite some positive growth, the corporate bond market in India remains significantly smaller as a percentage of GDP, standing at just 18%. This is starkly lower than markets in countries like South Korea at 80% and China at 36%.

The corporate bond market in India has witnessed a notable increase in activity. From April to December 2024, corporate bond issuances amounted to Rs 7.3 lakh crore, with an average monthly issuance of Rs 0.8 lakh crore, marginally higher than the average of Rs 0.66 lakh crore in the corresponding period of the previous year.

“Increasing investor demand and elevated costs of borrowing from banks have made these markets more attractive for corporate for funding requirements,” the report mentioned.

However, the Economic Survey added that the market remains concentrated in the top-rated bonds, with 97% of issuances falling within the top three rating categories (AAA, AA+ and AA). This shows that issuers who are unable to get these ratings are unable to access the bond market. “This may explain why most issuers are NBFCs or public sector undertakings (PSUs),” it added.

Nageswaran also pointed that an overwhelming majority of corporate bond issuance happens through the route of private placement, which significantly limits the participation of retail investors.

In FY24, the public placement of corporate bonds stood at Rs 19,000 crore against the private placement of around Rs 8,38,000 crore.

“The financial services sector dominates the issuance of corporate bonds at nearly 60 per cent of the total (International Monetary Fund (IMF), 2023). Outside financial services, real estate and power generation/ supply comprise the rest,” the Economic Survey noted.

As a result, corporate bond issuance from manufacturing and non-energy infrastructure sectors comprises a very small proportion of the overall bond market. From April to December 2024, Rs 16,456 crore was raised by Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).

How to Address The Challenges

For India’s corporate debt market to reach its full potential, the survey suggests addressing several key issues such as entry costs, information asymmetry and the absence of a secondary market. For example, insurance and pension funds cannot be invested in bonds that are lower than AA-rated. This effectively crowds out small players in the corporate bond market.

Liquidity is also bottled through regulations that prevent provident funds from investing in corporate bonds for more than three years. Moreover, insurance funds are not allowed to invest in debt issued by private companies.