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New Delhi: Chief Economic Advisor V. Anantha Nageswaran addresses the CII Finance 3.0 Summit, in Mumbai, Monday, Sept. 2, 2024. (Photo: PTI)
India’s Chief Economic Advisor V Anantha Nageswaran on Monday cautioned that when the financial market becomes bigger than the economy, it is natural, but not reasonable, for the considerations and priorities of the financial market to dominate macroeconomic outcomes. As India looks ahead to 2047, he advised avoiding this trend, noting that the consequences of such financialisation in the developed world are evident.
The dominance of the financial market over policy and macroeconomic outcomes is referred to as financialisation.
Speaking at the CII Financing 3.0 Summit in Mumbai, Nageswaran stated that when the financial sector is in excessively robust health, the health of the rest of the economy becomes fragile.
“India’s stock market capitalisation is around 130 per cent of GDP. The record profitability of the Indian financial sector and the high levels of market capitalisation or the ratio of market capitalisation to GDP give rise to another phenomenon that needs to be examined,” he said.
He added that financial markets are not the most reliable barometer of risk and reward. If they are not reliable, they cannot be trusted to direct available savings to their most efficient applications.
Additionally, Nageswaran noted that developed economies, after becoming materially prosperous, have experienced the impact of financialisation in the form of unprecedented levels of public and private sector debt, economic growth dependent on a continued increase in asset prices, and a massive surge in inequality.
India, which is still in the lower-middle-income category, must evade these outcomes and avoid a crisis. Therefore, he emphasised the importance of deliberating on preparing the financial system to support India’s economic aspirations, as the country can ill afford the financialisation and its ramifications that afflict advanced societies.
Nageswaran also highlighted the financial sector’s importance over other sectors, stating that it carries a higher responsibility because the impact of events in the financial sector reverberates throughout the economy.
“The big difference between the financial sector and other sectors is that the consequences of what happens in this sector reverberate throughout the economy and beyond, carrying, therefore, a significant weight of responsibility on its shoulders,” he said.
He also mentioned that the dominance of banking support for credit has been reduced and is being replaced by the financial sector, both in terms of products and participants, which is a positive development for the country. However, the sector must ensure that as it grows in size and importance, it avoids the mistakes that its developed counterparts have committed over the years.
First Published: Sep 02 2024 | 2:19 PM IS