The Economic Survey 2025-26 has delivered a clear message: India’s next phase of financial deepening cannot rely on equities alone. To support long-term growth, manufacturing expansion, and job creation, the country must urgently strengthen its corporate bond market.
Despite rapid growth in equity markets, India’s debt markets remain shallow and underutilised, limiting access to long-term, low-cost capital for businesses, especially mid-sized firms.
The Core Problem: An Underdeveloped Bond Market
India’s corporate bond market is worth just 16-17% of GDP, far below global peers:
- United States: ~40% of GDP
- China: ~36% of GDP
In comparison, India’s equity market capitalisation exceeds 130% of GDP, creating an imbalance in how firms raise capital.
According to Chief Economic Adviser V Anantha Nageswaran, this skewed structure increases dependence on banks, raises borrowing costs, and constrains long-term investment, particularly in manufacturing and infrastructure.
Why This Matters for the Economy
A weak corporate bond market has three major consequences:
- Higher cost of capital for firms, especially those below AAA rating
- Limited funding options for mid-sized companies that drive job creation
- Underutilised household savings, which are increasingly flowing into equities but not debt
The Survey argues that shifting even a part of household savings into bonds could improve financial stability and reduce systemic risk.
What the Survey Recommends
1. Tax Reforms to Attract Long-Term Investors
The Survey supports simplifying the tax structure for bonds to make them competitive with equities. This aligns with industry demands to restore indexation benefits for debt mutual funds, which were withdrawn in Budget 2024 and led to sharp declines in debt fund inflows.
Industry bodies have also proposed a Debt-Linked Savings Scheme (DLSS), similar to ELSS, to incentivise long-term fixed-income savings.
2. Stronger Insolvency and Recovery Framework
Investor confidence in bonds depends heavily on recovery certainty. While the Insolvency and Bankruptcy Code (IBC) has improved outcomes, the Survey calls for:
- Faster resolution timelines
- Higher recovery rates
- Greater predictability in insolvency outcomes
Stronger recovery mechanisms would make mid-rated bonds more investible.
3. Better Regulatory Coordination
One major bottleneck is overlapping regulation across SEBI, RBI and the Ministry of Corporate Affairs. The Survey recommends:
- Joint regulatory circulars
- Clearer division of responsibilities
- Single-window systems for bond issuers
This would reduce compliance friction, especially for smaller issuers.
4. Deepening Market Infrastructure
India’s bond market suffers from low liquidity:
- Average daily secondary market volumes: ₹7,000-10,000 crore
- Participation dominated by a narrow group of institutions
To fix this, the Survey suggests:
- Unified trading platforms
- Enhanced market-making
- Broader participation by pension funds and insurers
- Regulatory flexibility for investment in mid-rated securities
What Has Worked So Far, and What Hasn’t
Regulators have taken steps, including:
- Request-for-quote trading platforms
- Measures to improve retail access
- Promotion of InvITs and REITs
- Improvements in settlement systems
However, the Survey notes these reforms remain fragmented and need coordinated execution to achieve scale.
The Bigger Picture: Growth, Jobs, and Stability
A deeper corporate bond market could:
- Lower financing costs
- Improve price discovery
- Reduce over-reliance on banks
- Support manufacturing-led job growth
The Survey stresses that India must move beyond a bond market dominated by AAA issuers and adopt tools like partial credit guarantees and blended finance to help mid-tier firms access capital.
Bottom Line
India’s equity markets have matured. Its debt markets have not.
The Economic Survey makes the case that without meaningful debt market reforms, India risks constraining its growth ambitions. With coordinated tax, regulatory, and insolvency reforms, corporate bonds could become a powerful engine for long-term investment, financial stability, and inclusive growth.
Source: Business Standard