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Deeper capital market to help India unlock $100 billion in funding every year

McKinsey & Co pegged the size of India’s capital market at $140 billion but termed India’s ability to funding at scale as moderate with shallow pricing efficiency.

, ET Bureau|
Updated: Apr 12, 2017, 06.42 PM IST
Kolkata: India can unlock $100 billion of fresh funding every year for corporates and core sector companies if policymakers take steps to deepen the country’s capital market, McKinsey & Co said Wednesday.

The consulting firm pegged the size of India’s capital market at $140 billion but termed India’s ability to funding at scale as moderate with shallow pricing efficiency.

“If India is able to take right policy measures, the size of the market can rise to $240 billion in a year,” Nitin Jain, senior expert at McKinsey & Co, told ET.

McKinsey released a report analysing key performance metrics for 12 large Asian economies including India. It observed that while Japan and Australia rank high in funding, India needs steps to channel its significant savings into productive purposes and to accelerate economic growth and potentially lift millions from poverty.

The report suggested that deeper capital markets in emerging Asia could free a cumulative $800 billion in funding annually, mostly for mid- to large-sized corporations and infrastructure.

Emerging economies, according to McKinsey, do not have access to predictable capital market funding at scale and investors lack the financial instruments to deploy long-term savings. This led poor allocation resources pulling down growth prospects.

In India, the biggest challenge is to develop the corporate bond and securitization market. Emerging market issuers lack options to diversify funding and to match funding with their needs. The absence of a long-dated bond market reduces the flexibility of corporate borrowers to align funding structure with assets.

McKinsey said the listing of government-controlled entities is a step in right direction as it may entice investors to capital markets. It has suggested mandating state-controlled entities to tap debt capital for funds instead of going for bank loans.

Issuers in emerging markets face a more volatile and higher cost of capital compared with developed markets. They pay roughly a 120 percentage point higher real cost for debt securities, making it difficult to raise funds for new ventures and to grow existing large companies or conglomerates.

“Ultimately, this stifles economic growth,” McKinsey said, adding: “This is not a technical issue but a nationwide (and in some cases, regionwide) change management challenge that requires a new mindset. The stakes are enormous.”

Investors too face similar challenges. They put a large part of their savings in physical assets such as real estate and gold, and bank deposits. “They also face poor risk-adjusted returns on capital market products, mostly because of higher volatility,” Jain said.

“The inability to match long-term savings with future pension and health requirements, combined with aging populations, risks creating a generation of poor retirees,” McKinsey said in the report.

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