If the Union Budget 2022 had a headline, it was the massive increase in govt spending on capex for Infrastructure. Finance Minister Nirmala Sitharaman talked of the multiplier effect of such expenditure (₹2.95 to the rupee) vs that of revenue expenditure (₹0.95 to the rupee).
For sustainable growth of an economy a deep and liquid bond market is essential. India’s funding needs are for rapid expansion, capital expenditures, mergers and acquisitions: all require a deep, vibrant debt market that takes the pressure off an overburdened banking system. Think about it: aside from the top tier, most businesses don't have access to equity funding, and when they turn to debt, they run up against an overburdened banking system.
This isn't just a problem for corporate India. The government too, needs to borrow for financing public institutions, welfare activities and capital expenditure when the tax collections are not enough to finance these. At the end of FY2021, the government borrowing stood at 60.5% of the GDP, in no small part due to all the expenditure on relief measures necessitated by the Covid-19 pandemic. Where do governments turn to, to finance their debt?
One way is to issue dollar bonds, which can be a risky proposition as it involves borrowing in foreign currency. Another alternative is to find a way to channel the massive savings of a growing country to finance public debt. And that is exactly what the Indian government is trying to do, by making it simple for retail investors to invest in government bonds directly.