Budget-2024: How can Capital-Market swap fiscal debt and support the Economy?

On July 9, 2024, India's market capitalisation of listed companies exceeded $5.0 trillion, reaching about 145 per cent of nominal GDP—almost near the 146 per cent recorded in December 2007. Several nations have market caps ranging from 100-337 per cent of GDP during CY 2020-23. However, questions arise about how long this can be sustained, how the booming market cap can swap fiscal debt and support the Indian economy, and how Budget 2024 can facilitate this.

To sustain a booming market, India must ensure consistent higher GDP growth, driven by an investment-led and export-led growth model. For higher investment rates in productive assets and supporting infrastructure, domestic financial savings are inadequate. Therefore, India needs global investments, such as FDI or FPI.

The ratio of cumulative investment in FPI to nominal GDP as of March 2004, March 2014, and December 2023 was 4.3 per cent, 7.66 per cent, and 5.48 per cent, respectively. According to CDSL, cumulative investment by FPIs in equity, debt, and hybrid instruments until March 2004 was barely Rs. 1.19 trillion ($260 billion). By the end of FY 2004-14 and FY 2014-2024 (up to Q3), it had reached about Rs. 8.61 trillion ($1423 billion) and Rs. 16.16 trillion ($1955 billion), respectively. Thus, in the past two decades, the growth was about 724 per cent and 188 per cent on a rupee basis, and 547 per cent and 137 per cent on a USD basis, respectively.

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This data reveals that rupee stability is a prerequisite for consistent global capital inflow, providing higher returns on a USD basis to global investors. To achieve this, India must improve its economic efficiency by announcing multiple policy tools in the forthcoming Budget 2024, enabling India to become export-competitive and eliminate the past legacy of trade deficits (goods & services). During the interim period, Budget 2024 should provide incentives for incremental exports in a calibrated manner.

Also, long-term capital gains tax may be exempted or reduced for global investors if the sale proceeds of equity/bonds are reinvested into the Indian capital market within the same year. This will reduce repatriation of forex and support the economy. Budget 2024 is the opportune time for giving such incentives.

Out of the total market cap, the share of the top 100 listed companies is about 75-80 per cent, while the remaining 6700 companies hold a 20-25 per cent share. Ideally, it should be broad-based for inclusive growth. Among the top 100 listed companies, about 18 PSU companies have a market cap share below 10 per cent; this must increase through new listings.

There might be more than 400 unlisted public sector enterprises (PSEs) owned by state and central governments in various fields such as railways, NHAI, power generation and transmission, ports, airports, mining, insurance, finance, and many others. These may be corporatized and listed with stock exchanges, as recently done with LIC. Through this, governments can raise funds by selling shares to the public in tranches while retaining ownership. This will be a better choice compared to total disinvestment and/or leasing out. Part of the fiscal debt may be swapped with equity in this way.

These PSUs may invest in their core competence areas and allied fields by raising debt in their balance sheets, which will not be part of the fiscal debt. Particularly, railways have significant potential to invest in increasing goods traffic and earning substantial profits. This will reduce logistics costs, benefiting the economy and kick-starting the private investment cycle.

The balance sales proceeds of shares may be invested in niche sectors such as the manufacturing of defence and aviation equipment, exploration of oil and critical minerals, and research and innovation in various fields, mostly in new unlisted corporates. These may be listed in due course after making profits. Private corporates hesitate to invest in such niche areas due to associated risks. However, these are crucial for India in meeting its future economic needs and cutting down imports.

For infrastructure spending, new PSUs may be incorporated and listed in joint ventures with states and/or reputed corporates by infusing part equity from the budget and balance from the capital market. Such listed PSUs shall raise debt from the bond market against sovereign guarantees. Obviously, this debt will not be part of the fiscal debt. However, such PSUs shall undertake only commercially viable infrastructures. By this, budgetary resources shall be leveraged 3-5 times, and the benefits of a booming capital market may be availed.

Currently, the share of the bond market is very small compared to other major economies. Ways and means must be designed for its promotion. For PSUs, sovereign guarantees may be provided. The recent inclusion of Indian bonds in the JP Morgan index will certainly facilitate this. However, a stable rupee is a prerequisite. By this, the bond market shall grow, facilitating higher growth of investment in the productive sector and GDP in future years. Banks shall have surplus funds for financing unlisted small companies.

By and large, a booming market cap must be used for partly swapping fiscal debts and floating new PSU corporates for infrastructure spending. This will support the long-term GDP growth of India. Reduction of fiscal debt will upgrade the sovereign rating and facilitate higher inflow of global funds. Thus, the benefits of a booming market cap can deliver multiple benefits for the nation and the general public by adopting appropriate strategies and wise policy tools, which may be announced in the forthcoming budget.