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Under-penetration of debt is stifling India’s economic growth

The higher the debt to GDP ratio, the greater the availability of debt capital for prospective borrowers in a country. Leverage can be an important tool that countries use to grow. Could debt be the answer to India’s macroeconomic predicament?

January 29, 2022 / 01:30 PM IST

The last 2 years notwithstanding, the Indian growth story has been stellar. The Indian economy grew from a GDP of $1.67 trillion in 2010 to $2.66 trillion in 2020. During this same period, Brazil's GDP numbers moved from $2.20 trillion to $1.44 trillion and Russia's from $1.52 trillion to $1.48 trillion. One could still envy China though, which grew from $6.08 trillion to a whopping $14.72 trillion. 

What is China doing differently? Here are some interesting numbers quoted by the International Monetary Fund:
Nonfinancial corporate debt, loans and debt securities ratio to GDP - 2010Nonfinancial corporate debt, loans and debt securities ratio to GDP - 2020General Govt. Debt - 2010

General Govt. Debt

2020
India 62.84%56.2%66.4%89.61%
Russia52.83%94.16%10.11%19.28%
Brazil35.62%53.97%62.43%98.09%
China 110.86%139.12%33.92%68.04%

 

It would, of course, be an oversimplification to say that these debt to GDP ratios are the main reason why the Chinese economy is propelling itself forward at such speed. However, we must acknowledge that it is one of the more significant reasons. At a Corporate Debt ratio of 139%, Chinese businesses don't struggle for capital. Indian businesses do, at the dismal rate of 56%. 

Why Is Debt So Important For Nation Building? 

In plain terms, think about how a business raises money for growth. They either raise capital through equity, or through debt. India's equity market is comparatively deep: there are a number of players operating across categories of capital seekers, there are two depositories, and brokerages abound. Moreover, for anyone who wants to trade in equity today, the barriers to entry are very small, thus enabling unparalleled liquidity. Raising money through equity, however, generally only benefits those businesses that have achieved a certain scale. 

For smaller businesses, debt is the only other option. Unfortunately, India is largely a bank debt driven market, and most banks have credit policies that make availing credit a challenge for smaller businesses. This is reflected in the rate of growth we see in the MSME sector. 

SMEs make up over 99% of all enterprises in China today, with an output value of at least 60% of its GDP; they generate more than 82% of employment opportunities. Contrast this to the 63 million MSMEs in India who contribute only 30% to the country’s GDP

Bank credit isn't a great option for long term or infrastructure projects either. Consumer fixed deposits in banks range between 5-7 years, on average. When this money is deployed in an infrastructure loan, the window tends to be thrice as long. This deters banks from entering into these loan arrangements, forcing India to approach agencies like the World Bank for infrastructure loans. 

Is it possible to drive investor adoption of debt markets along the same lines of equity? 

How Are Debt Markets Different From Equity? 

In equity markets, businesses are represented by just one or two instruments. Whereas, in debt markets, each company can have several outstanding instruments, each carrying their own terms and conditions and risk profiles. The challenge lies in providing this information to lenders in a way that allows them to compare various lending/investment opportunities with the same business, or beyond. 

Another important thing to note is that the Indian debt market still operates on archaic systems, mostly manual in nature, thus creating an inefficient ecosystem, in terms of value to each participant.

Digitisation Can Be The Answer 

The movement from paper to digital created enormous impetus for the equity market. The Debt Market in India is in its nascent stages, akin to equity market pre-liberalisation, and needs the same sort of digitisation. This is where companies like CredAvenue are stepping in. 

CredAvenue is building an infrastructure specific to debt products. By parameterising the various factors that go into the risk-reward evaluation of debt products, CredAvenue is making it possible for individual and institutional investors alike to invest in debt products with confidence. 

More than 80% of the debt raised in India, especially on fixed income products like bonds and asset-backed securities, are towards the higher rated entities. This leads to a majority of institutions going under the radar-who are otherwise debt-worthy. 

CredAvenue is creating a digital debt marketplace where borrowers have access to a range of lenders. In a debt marketplace, investors and lenders can present their quotes on the basis of the business' risk profile, and the risk profile of that debt product. Then, it's up to the business to choose the quote that works best for them. In this way, no business is denied credit, and those with lower risk profiles are rewarded with better quotes. 

CredAvenue is also creating a universal operating system, where all market participants can be embedded and they can seamlessly play their role in a debt deal execution, irrespective of the ticket size or product variant, and bringing in unparalleled efficiencies in the lifecycle of a debt deal. 

Conclusion 

A strong debt market can unlock the GDP multiplier for India by making debt available to whoever needs it, while creating additional investment opportunities for individuals and corporations to deploy surplus funds, generating additional income.

Moneycontrol journalists were not involved in the creation of the article.
Tags: #Features
first published: Jan 27, 2022 08:38 pm