In 2020, India’s capital market issuances were approximately $250 billion, raising India’s rank to ninth on McKinsey’s Asian Capital Markets Development Performance Index. Compared to other Asian countries, India’s performance improved steadily in five years, with growth in private equity (PE) investments, corporate bond issuances, domestic mutual funds and equities, and foreign portfolio investments.

But how do India’s capital markets compare with those of developed economies? Most have a financial depth over 2.5 times that of India’s, with sophisticated markets and better fundraising for productive investments. India’s capital markets show relative stability, making it possible to deepen them by taking on more risk without suffering crises of volatility or liquidity. With six broad strategies, India could cross $700 billion in issuances by 2030.

Sustain the long-term growth of mutual funds: India’s mutual fund industry grew five times its size from 2010 to $480 billion in 2020, and could continue growing by widening distribution, particularly to tier 2 and 3 cities, with cost-effective technology-led distribution and partnerships with retail franchises and e-commerce firms. Innovative new products and structures could further diversify investor portfolios — example, funds that invest in high-rated ESG securities and international securities.

Enhance the role of private capital: At its present growth rate, India’s PE market is the poster-child for India’s capital markets. For this to continue over the next decade, a well-defined product strategy is essential, i.e., low volatility fixed income-oriented products for traditional institutional investors, and high risk-return products for ultra-high net worth individuals, such as long-short equity strategy, distressed assets, etc.

Accelerate the rate of disinvestment in public sector companies: Disinvestments could be made more efficient by identifying a strong pipeline for disinvestment, creating an efficient approvals process, engaging early to build consensus with trade unions and relevant ministries, and appointing professionals to manage the process.

Expedite infrastructure financing: India’s $2 trillion National Infrastructure Plan requires excellence in infrastructure financing. Stakeholders could identify bankable projects by sector, size, cost, economic benefit, and ease of implementation, and create a ministry-wise framework to continuously monitor priority projects.

They could improve project development with a task force that monitors and removes bottlenecks from high-priority projects, empower central regulatory agencies’ investor cells to implement best practices in governance and communications, and run a faster dispute resolution process. Finally, they could accelerate project financing through funds from domestic institutions, foreign sovereign wealth funds and pension funds rapidly set up the Credit Guarantee Enhancement Corporation, and recycle assets by reducing the minimum holding period for concessionaires.

Digitise financial assets : As of December 2020, the estimated market value of gold in India was $1.6 trillion — a major opportunity to tap physical asset classes. Gold monetisation could create up to $100 billion in liquidity for long-tenor and affordable funding. India could also reduce its yearly import bill by $4 billion with gold e-commerce.

Seizing this opportunity requires several measures, including well-defined regulatory architecture and standards to provide clear direction and supervision, while simultaneously promoting market development — example, tax incentives.

Grow sustainable finance: India’s sustainable funding requirements could top $2 trillion by 2030 — calling for new ways to finance and invest in ESG initiatives.

India could reduce ESG funding costs by lowering risk-weight assets, and mandate public funds to enhance exposure to ESG securities.

The writers are, respectively, Senior Partner and Senior Expert, McKinsey & Company, Mumbai and New Delhi