Mumbai, Sep 2 (PTI) — India’s Chief Economic Advisor (CEA) V Anantha Nageswaran on Monday highlighted the bright prospects for India’s economic growth but warned against the dangers of ‘financialization’—the increasing dominance of financial markets in shaping public policy. Speaking at the CII Financing 3.0 Summit, Nageswaran emphasized the need for caution as India aims to become a developed nation by 2047.
The Rise of Financialization and Its Risks
Financialization refers to the growing influence of financial market trends and interests in public policy and macroeconomic outcomes. Nageswaran noted that India’s stock market capitalization is about 140% of its GDP, a figure that indicates the substantial role that financial markets play in the economy. He pointed out that the record profitability of the Indian financial sector and high levels of market capitalization deserve closer scrutiny.
“When the market becomes bigger than the economy, it is natural, but not necessarily reasonable, for the market’s considerations and priorities to dominate public discourse and influence policy,” Nageswaran stated. He cautioned that while this phenomenon is observed globally, India must avoid similar pitfalls as it charts its path to becoming a developed economy.
Learning from Developed Economies
Nageswaran drew parallels with the experiences of developed countries, where financialization has led to several adverse outcomes, including unprecedented levels of public and private sector debt, dependency on rising asset prices, and increasing inequality. He warned that India, still a lower-middle-income country in terms of per capita income, cannot afford to follow the same trajectory.
“India must be wary of these outcomes and avoid this trap,” he said, underscoring the importance of maintaining policy autonomy to shield the economy from the volatility of global capital flows. Despite a modest current account deficit, India remains dependent on global capital flows, which makes it crucial to balance national imperatives with investor interests.
Balancing National Imperatives and Investor Interests
The CEA emphasized the need for India to strike a fine balance between meeting national economic goals and catering to investor preferences. He suggested that India should aim to become a global agenda setter rather than just an agenda taker. To achieve this, India must build its economic strength, size, and vitality while ensuring that its aspirations for setting global agendas do not outpace its economic capabilities.
While discussing measures to achieve this balance, Nageswaran proposed the development of an Indian entity that could emerge as a global credit rating agency, though he acknowledged that realizing such ambitions would take time.
Strengthening the Financial Sector
C S Setty, Chairperson of the State Bank of India (SBI), stressed the need to develop India’s corporate bond market. He highlighted the importance of involving non-bank financial institutions, such as insurance companies, mutual funds, and pension funds, in the corporate bond market to channel more capital into the economy.
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Setty also addressed concerns about stagnant deposit growth in banks and its impact on credit expansion. He argued that credit growth should not be driven solely by banks but by a diverse range of financial sector players. He called for continuous innovation in delivering financial products and developing skill sets within universal banks to handle credit in new and emerging sectors, such as battery storage and hydrogen.
Ashishkumar Chauhan, Managing Director & CEO of the National Stock Exchange, echoed these sentiments, emphasizing the need to adopt new technologies that can add significant value with minimal capital investment. He highlighted the role of capital markets in supporting economic growth by preventing excessive corporate debt and leveraging innovative technologies.
Fostering a Harmonized Regulatory Environment
CII Director General Chandrajit Banerjee emphasized the role of financial institutions in supporting small and mid-sized enterprises (SMEs) and micro-industries, helping them integrate into the supply chain and become more competitive. He pointed out the need to address challenges such as green financing, digital transformation, and environmental, social, and governance (ESG) criteria to help India’s SMEs thrive.
Sanjiv Bajaj, Past President of CII and Chairman & Managing Director of Bajaj Finserv, underscored the need to enhance credit availability, broaden financial market participation, and further develop the corporate bond market. He stressed the importance of fostering greater harmony among various regulators to ensure that policies are both robust and conducive to innovation.
As India looks ahead to 2047, the path to becoming a developed nation requires careful navigation. The insights provided by Nageswaran and other key financial leaders underscore the need to balance market dynamics with policy autonomy, innovation, and inclusive economic growth. Avoiding the pitfalls of financialization while fostering a resilient and equitable financial ecosystem will be crucial in achieving India’s economic aspirations.
