Investing Productively: The Securities Market

Relative to labor, capital is India’s scarce factor of production. Therefore, it is particularly important that it is allocated to the most productive activities. Well-functioning financial markets are critical to achieving this objective. Accordingly, this chapter focuses on the securities markets in India. In terms of new issues, private placements have dominated securities markets in India, both in equity and in debt. When it comes to public placements, while there is a bit of liquidity in equities, the same is not the case in the debt market. The market in publicly traded corporate bonds is thin, with limited liquidity. This chapter offers a number of ideas to deepen this market. For instance, rules governing investment in these bonds by pension, provident, and insurance funds may be liberalized. The government may also partially de-risk long-term bonds for infrastructure projects through provision of collateral.