Chief Economic Advisor (CEA) V. Anantha Nageswaran addressing the media at the National Media Centre, in New Delhi on Friday.
| Photo Credit: Sushil Kumar Verma
With a large part of the household savings heading to the stock market and increasingly retail investors taking charge at Dalal Street, excessive financialisation can hurt the economy and the costs may be particularly high for a low-middle-income country like India, the Economic Survey 2024-25 has cautioned.
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“One critical risk to guard against is the dominance of financial markets in shaping policy and macroeconomic outcomes, a phenomenon known as ‘financialisation.’” the Survey has flagged.
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“The consequences of financialisation are evident in advanced economies, where it has led to unprecedented levels of public and private sector debt— some visible to regulators and some not,” it stated.
“Economic growth in such contexts becomes overly reliant on rising asset prices to offset leverage, exacerbating inequality and asset market considerations that may overly influence public policies, particularly regulatory ones,” it added.
According to the Survey India should strive to maintain a fine balance between financial sector development and growth on the one hand and financialisation on the other.
“It means that the country has to chart its path with respect to its context, considering the levels of financial savings in households, its investment needs, and levels of financial literacy. Ensuring that incentives in the sector are consistent with national growth aspirations is a policy imperative,” it stated.
The Survey emphasised that while there is evidence of increasing reliance on the financial markets as a funding source, the financial markets must work in tandem with the banking sector to bridge the capital requirement gap.
“The financial markets must grow in line with, but not faster than, the economy’s capital needs and overall economic growth,” it stated.
“As the country undergoes this significant transformation, it is crucial to be aware of the potential vulnerabilities that may arise. India must prepare itself with appropriate regulatory and government policy measures to intervene and mitigate these risks when necessary,” it pointed out.
Additionally, banks need to enhance their capabilities to meet the demands of new-age households and the digital economy while maintaining their primary credit creation function, it concluded.
Published – January 31, 2025 05:03 pm IST
