Building the bonds of Viksit Bharat: A leap towards India's vision

Budget reforms will redefine the financial system by fostering inclusion, competition, and efficiency. Financial institutions will benefit from enhanced market depth and improved liquidity

India’s total credit outstanding —government borrowings, corporate and municipal bond market, securitisation, money market and gross bank credit — stood at 163 per cent of gross domestic product (GDP) in  2023-24 (FY24). In comparison, it was 266 per cent of GDP for the US at the end of calendar year 2023. Our government borrowing and bank credit, at 87 per cent and 56 per cent of GDP respectively, are relatively well-developed. However, the bond market accounts for only 19 per cent of GDP, and significantly trails that of the US, which stands  at 119 per cent of GDP. 

Interestingly, our credit-to-GDP ratio currently stands at a level similar to that of the US in 1986. The US bond market’s remarkable growth, from 70 per cent of GDP in 1986  to 119 per cent of GDP now, exemplifies the benefits of developing all the segments of the bond market. 

Corporate bond market:  

The US corporate bond market, at 46 per cent of GDP, has scale and depth. Notably, bonds rated ‘A’ and below constitute over 90 per cent of the US market. During the 1980s, a period marked by high inflation and banking crises, US corporations began to turn away from traditional bank loans and instead sought funding through bond issuance. Our corporate bond market, at only 16 per cent of GDP, is largely limited to ‘AAA’ and ‘AA-rated’ issuers, leaving immense room for growth. A vibrant corporate bond market such as the US can provide resilience and flexibility to companies. 

Securitisation market:  

In the US, this market, which represents 53 per cent of GDP, has been crucial in supporting consumption growth. By freeing up bank capital, securitisation facilitates affordable lending, which supports consumer credit growth. The success of the US securitisation market is inextricably linked to the housing finance market, with government-sponsored entities such as Ginnie Mae, Fannie Mae and Freddie Mac playing a crucial role. These entities provide credit enhancement through guarantees on timely payments to investors. 

In contrast, our securitisation market accounts for only 1.3 per cent of GDP. Expanding securitisation in the country can empower banks and non-banking financial companies to extend affordable loans, making aspirations of home ownership, business creation and education a reality for millions. The formation of the RMBS Development Company marks a significant milestone in this direction. This collaborative effort, driven by National Housing Bank and leading banks, underscores the industry’s commitment to developing a robust and efficient securitisation system. 

Municipal bond market:  

The municipal bond market in the US has enabled local governments to fund essential infrastructure by raising money directly from investors. The growth of the US municipal bond market, which now represents 15 per cent of GDP, has been fuelled by several factors, including significant fiscal autonomy, federal tax exemption, high retail participation, and a robust legal framework that provides a clear path for managing post-default scenarios for municipal bonds. Out here, a municipal bond market is almost non-existent  at less than 0.1 per cent of GDP. Only 16 municipalities have accessed this mechanism over the last 25 years, leaving vast potential untapped. For India’s urban centres to flourish, they need the financial autonomy that comes with a developed municipal bond market. By tapping into the bond market, municipalities can access an additional source of funding to invest in the critical infrastructure that underpins daily life, thereby alleviating the burden on state finances. 

India’s economic stages and growth dynamics differ from those of the US, but the fundamental principles of market development, such as improving market infrastructure, enhancing transparency and broadening access to credit, remain universally applicable. India can draw lessons from the US experience, while adapting its approach to dovetail its unique needs and circumstances. By doing so, India can take a major leap towards achieving its vision of a Viksit Bharat. 

The writer is managing director, Crisil Ratings