Lack of developed corporate bond market will become bottleneck to India’s growth: NITI Aayog V-C

NITI Aayog V-C B V R Subrahmanyam

India’s corporate bond market risks becoming a bottleneck to long-term growth, NITI Aayog Vice-Chairperson B. V. R. Subrahmanyam said on 11 December.

He noted that companies rely heavily on banks for funding, which can be costlier than market-based debt. “Investment is funded by equity or debt. Debt markets are mostly controlled by banks. Corporate debt is still a baby as compared to our equity market,” he said at the launch of the report “Deepening the Corporate Bond Market in India”.

Comparing India with global peers, he added, “In the US the corporate debt market is large. Bond markets are larger than equity markets in the US. In India the gap is acute, the equity market is seven times larger than corporate bond markets. Lack of a developed corporate bond market will become a bottleneck to growth.”

Highlighting the need to modernise India’s debt market infrastructure, he said, “Banks tend to be costlier for companies’ borrowings. Need to have a better way to rate our bond market. Need innovation for more types of bonds to be introduced.”

Funding gaps 

The NITI Aayog in a presentation said, “Realising the vision of Viksit Bharat and building a US$30 trillion economy requires cost-effective, long-term financing across infrastructure, MSMEs, start-ups, and emerging sectors. A vibrant corporate bond market is crucial to mobilise capital efficiently, create a balanced financial eco-system and reduce over-reliance on banks, and drive inclusive, sustainable growth.”

“Corporate bonds at approximately $642 billion vs equity market capitalisation at roughly $4.8 trillion (approximately 7X) as of March 2025. Equity alone cannot meet India’s diverse capital needs e.g. in infrastructure, MSMEs, and emerging technologies,” the think-tank said.

Challenges in the market

The report identified several structural and regulatory constraints. It said, “Insurance and pension funds face limits (for e.g., AA-only). High-rated issuances dominate; mid-sized firms struggle due to weak credit histories and credit tools. Hedging tools for interest-rate and credit risks remain underdeveloped, illiquid, and sparsely adopted.”

NITI Aayog also highlighted operational bottlenecks, “Overlapping regulations from SEBI, RBI, and MCA increase compliance burden and delays. Extensive disclosure requirements - 20–60 days for issuance in India vs 1–5 days in the U.S. and UK. Private placements dominate (98 percent of issuances), limiting retail access.”

Three-phase reform roadmap

The report recommends a phased implementation. In Phase I (Short-term, 1–2 years), it suggests to “Strengthen bankruptcy laws and resolution frameworks, establish a unified market development authority or task force, introduce an issuance framework for lower-rated corporate bonds, and develop digital infrastructure for bond issuance, listing, and compliance.”

In the Phase II (Medium-term, 2–4 years) it suggests to “Scale up SME bond issuance through dedicated SME exchanges, expand availability of risk capital through financial institutions and targeted fiscal support, diversify instruments with direct subsidy bonds, ladder funds, covered bonds, and institutionalise ESG and sustainable finance frameworks.”

In Phase III (Long-term, 4–6 years), it suggests to “Strengthen Credit Default Swap and risk management markets, expand securitised and alternative instruments to diversify funding sources, create a secure, transparent and fully digital bond ecosystem using blockchain-based solutions, and apply Artificial Intelligence and Machine Learning-enhanced regulatory systems enhanced regulatory systems for predictive analytics and investor risk assessment.”

The report also examines international best practices. It says, “Countries such as the US, China, South Korea, Hong Kong, Singapore, and Malaysia have used digital infrastructure, credit guarantees, tokenised bonds, and retail access frameworks to deepen corporate bond markets.”