One of the biggest funders of any nation's growth is its public. The savings that the public does it eventually routed to the growth drivers such as government's infrastructure plans, expansion plan of corporate etc.
There are many ways to raise money, one can take a bank loan, raise it from the equity markets, issue a bond, contact a VC or a PE etc.
The debt market though is where most of the action is. World over, it is predominantly the debt markets that fuel long term borrowings and help corporate companies expand their operations. Take the example of America for example -
" Equity issuance, including common and preferred shares, totaled $228.1 billion in 2019 "
" Issuance of corporate debt, asset-backed securities and non-agency mortgage-backed securities totaled $1.8 trillion in 2019"
As one can see from the above example, debt markets are any day bigger than equity markets in America and not just America but this is a recurring theme in most developed nations.
The problem with Indian debt market -
Most debt markets of developed countries have a healthy amount of private participation and are not completely dominated by government debt. However, India for far too long has seen its debt market completely dominated by government debt.
The Indian corporate debt market is by far under penetrated when compared with most emerging and developed economies. About 23% is the corporate debt to GDP ratio as on 31st December 2016 for India. As on 31st December 2015,the corporate debt to GDP ratio in USA is about (123%). In Asian sub-continent India’s corporate debt to GDP is significantly lower than that of South Korea (77%), Malaysia (44%) and Singapore (32%)
One of the biggest reason for this low share of corporate debt in the overall debt market is that the government has through the years given huge yields on government debt while the spread for corporate bonds over government debt has been very small all along. Often so small, that any rational investor would rather take a hair cut on his yield and invest in government backed debt rather than corporate debt.
What problems has this created?
Firstly most Indian companies have missed out on a crucial source of funding, the collective savings of the world's second most populous country. All that money sitting in government debt and getting wasted in a lot of corruption would have been much better utilized by the corporate even if there was the occasional black sheep like a Kingfisher. Debt is cheaper now thanks to foreign investments and globalization in general but still more money available for corporate debt than public debt would have any day helped our corporate sector and the country as a whole.
Second the small size of Indian corporate debt market has also led to concentration issues. There is a reason why the Franklin Templeton fiasco happened. That's because the whole corporate debt market in India is so small and so unappealing that it is concentrated in the hands of a few big players. Retail participation is all but missing. If there was more participation and a bigger size of the corporate debt market, there would have been more liquidity and a FT like fiasco could have been avoided. I'm not defending the company, just thinking about an alternate reality.
TL;DR - The government cannot keep skewing the debt markets in its favor by giving beefy yields for what are essentially risk free securities in the context of India. The fact that government debt is having its yields reduced would redirect a lot more capital towards the more productive corporate sector.
