India’s debt markets have been in trouble for a while. Ever since Infrastructure Leasing and Financial Services (IL&FS) defaulted on its repayment obligations in September 2018, non-banking finance companies (NBFCs), along with housing finance companies (HFCs), have had to grapple with an acute liquidity crisis. And, towards the end of FY20, spreads on lower-rated issuers widened as demand for credit papers reduced after Franklin Templeton Mutual Fund announced the winding up of six of its debt mutual fund schemes with total assets of ₹25,000 crore-₹30,000 crore.

The Covid-19 pandemic just added fuel to the fire that the Indian debt markets have been living with. In this segment, the corporate bond market remains shallow and, historically, there has been hardly any change in the skew towards higher-rated issuances, particularly from the financial sector. However, things seem to be changing, especially in the context of the National Infrastructure Pipeline (NIP), which envisages investment to the tune of ₹111 lakh crore between FY20 and FY25, for India’s infrastructure build-out.

A point to note here is that ₹111 lakh crore is not a small number. And raising such a humongous amount, an onerous task even during normal times, has become much more challenging because of the fiscal stress in the wake of the pandemic. Moreover, this ambitious target of ₹111 lakh crore is more than twice the infrastructure investments of nearly ₹51 lakh crore seen between FY14 and FY19.

As much as 71% of the envisaged NIP investments are meant to be in four sectors—energy (predominantly power, renewables), roads, railways, and urban infrastructure. And, the ratings agency CRISIL, in its yearbook on Indian debt markets for 2021, estimates that over FY21 to FY25, issuances from the infrastructure sector should amount to nearly ₹5.5 lakh-₹7.5 lakh crore, predominantly led by infrastructure public sector undertakings such as the National Highways Authority of India (NHAI), NTPC, and Power Grid Corporation of India, followed by some private players in sectors such as roads, power, renewables, and telecom.

According to Ashu Suyash, managing director and CEO of CRISIL, the 2021 Union Budget’s thrust on ensuring a thriving—rather than just surviving—economy, would ensure that the government goes full throttle on investments, while giving a long rope to fiscal consolidation. “This heaps a huge responsibility on the private sector in general and the corporate bond market in particular to do some heavy lifting, and take up a fair share of the investment load,” Suyash noted in the foreword to the yearbook.

The rating agency argued that infrastructure, investment, and innovation, all necessitated by the pandemic, are scripting what promises to be an unusually busy time for the bond markets.

In fact, CRISIL envisages that innovation can help double the supply of corporate bonds in the domestic market to nearly ₹65 lakh crore-₹70 lakh crore (outstanding) by March 2025. However, demand is expected to be between ₹60 lakh crore-₹65 lakh crore, which means foreign capital will be necessary to bridge the ₹5 lakh crore gap, CRISIL said at its flagship bond market seminar where the yearbook was unveiled.

At the seminar, Ajay Tyagi, chairman of the Securities and Exchange Board of India (SEBI) noted that the Indian capital market, over the years, has played a pivotal role in the development of the Indian economy. “As India is surging ahead to become an economic powerhouse, the Indian capital market is expected to play a greater role and remain in the forefront in the days ahead,” said Tyagi, as he emphasised the importance of the corporate bond market.

Tyagi further pointed out that persistent efforts by the government and SEBI, in the last few years, have ensured that an otherwise nascent corporate bond market has moved towards maturity. “The effort on part of the government and SEBI is on-going. I am quite optimistic that the Indian corporate bond market will reach greater heights in the near future,” he said.

According to CRISIL, for the bond market to fill the gap, supply-side innovations such as pooling of assets, a well-capitalised Credit Guarantee Enhancement Corporation, and widespread adoption of the INFRA Expected Loss (EL) ratings scale will be pivotal. The INFRA EL ratings scale, introduced by CRISIL in 2017, assesses the EL over the lifetime of an infrastructure debt instrument and helps investors deduce the typically low EL of such projects and, thus, kindle their interest.

On the demand side, credit default swaps, retail participation, index linked funds, and mechanisms to improve liquidity will be enablers. Besides these, attracting foreign capital is crucial to bridging the emerging supply-demand gap, especially given the crowding out by gilts stemming from the huge borrowing programme of the government.

While CRISIL estimates innovations can help mobilise ₹7 lakh crore-₹10 lakh crore via infrastructure bonds through FY25, Suyash is of the view that pooled assets can bring scale, diversification benefits, and flexibility to structure the cash flows. “This can attract foreign capital and improve the confidence of bond market investors.”

Suyash also added that take-out financing facilitated by pooling of assets can help banks and other infrastructure financiers to free up a portion of the over ₹20 lakh crore credit outstanding in the sector for fresh lending to new projects. “InvITs [Infrastructure investment trusts], co-obligor structures, covered bonds, and securitisation are facilitative mechanisms for pooling assets.”

CRISIL is also of the view that enhancing retail participation via tax sops for investments in debt mutual funds—similar to equity-linked savings schemes (ELSS)—would ensure parity in capital gains tax between equity and debt products, and would encourage retail investors’ interest in corporate bonds. Further, attracting both domestic and foreign capital through exchange traded funds (ETFs) and other index-linked bond funds, which offer lower costs, more transparency, better liquidity, and potential to build diversified portfolios would help bridge the demand-supply gap.

Most importantly, the environmental, social, and governance (ESG) profiling of Indian corporates would attract foreign capital into the Indian debt capital markets. “Reporting and assessment of ESG factors can also make domestic bond issuances attractive to global funds, and act as a crucial facilitator,” said Gurpreet Chhatwal, managing director, CRISIL Ratings. “The inclusion of Indian bonds in global indices will also help channel financing from global index funds to the domestic bond market.”

In a virtual webinar—where Chhatwal and Somasekhar Vemuri, senior director at CRISIL Ratings, presented the details of the debt market yearbook—Vemuri highlighted that globally investors have invested $40 trillion using the ESG filters, and that number is expected to cross $100 trillion by 2030.

The key question in context of India Inc. is that of mind-set—as regulations or financial incentive play a crucial role in the adoption of newer concepts. While responding to the above query from Fortune India, Chhatwal pointed out that regulations can aid to a certain extent only. “After which, higher levels of investments and superior valuations will push companies to adapt and adopt ESG standards.”

On its part, CRISIL is of the view that issuers will need to keep their ears to the ground. Independent assessment of the ESG credentials that lend credibility and make instruments attractive to ESG-conscious global funds will be a crucial facilitator.

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