Development of domestic capital market in emerging economies and its impact

Abstract

Development literature has shown a direct positive relationship between the maturity of an economy’s capital market and the GDP of the country. This is because a booming capital market helps to pump investments and boost money into the economy. The funds generated through capital markets can be leveraged for a host of developmental needs of the government and society. A capital market, which is regulated to some extent by legal and institutional frameworks, has the right balance of public and private players, which makes it socially adept as well as operationally efficient and competitive. This gives rise to innovative alternative mechanisms and models of financing which help develop markets and the economy as a whole. This report attempts to make a case for leveraging innovative sources of finance in the Indian capital market for social and economic development of the country. The initial sections of the paper are used to set context and establish the link between capital markets and GDP growth. This is done through a comparative view of capital markets in developed vs. emerging economies. The role of the World Bank and IFC is delved into, keeping in mind its active commitment towards revamping capital markets of middle- to lower-income economies to help meet the global Sustainable Development Goals by 2030. The next section of the report delves into the Indian scenario, providing an overview of the Indian capital market. This section provides a comparison between Indian capital markets and those of other developing nations such as Africa, Indonesia, etc. The prominent issue of information asymmetry and inaccessibility that plagues the Indian domestic capital market is also delved into, in this section of the report. The study then presents a framework to identify and prioritize various alternative sources of finance by mapping them across 3 key parameters – their impact in India’s most lagging sectors of education and health, India’s preparedness to incorporate and leverage these alternative sources from a regulatory and an infrastructural perspective, and the degree of innovation of each of these instruments. 16 alternative sources of financing were identified and prioritized using this framework, some of which are already prevalent in the Indian market, while others are highly innovative and disruptive. We then analyse the results from the framework to identify potential next steps for the government and other regulatory bodies, such as RBI, SEBI, global banks, etc.