India needs to be cautious against excessive ‘financialisation’ says Chief Economic Advisor | Current Affairs | Vision IAS
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India needs to be cautious against excessive ‘financialisation’ says Chief Economic Advisor

Posted 05 Sep 2024

2 min read

Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes.  

  • Thus, financial intermediaries and technologies gain unprecedented influence over our daily lives.
  • It also describes moving investments away from traditional, ‘physical’ asset (like real estate, gold) towards ‘financial assets’ (like mutual funds).

Factors driving financialisation

  • Rising middle class with higher disposable income
  • Inflation due to which households are seeking higher returns beyond fixed deposits
  • Government incentives on these instruments
  • Increasing digitisation and financial inclusion

Why is excessive financialisation a concern?

  • Increased Inequality: Financial income is funneled to top 1% of population through equity ownership.
  • Distorts functioning of economy:  Profits flow increasingly from financial investments, rather than trade in goods and services.
    • Thus, movements of stock market primarily determines functioning of economy instead of production of employment or rising standards of living.
  • Rising Household debts: Stagnation of real wages may increase Households’ reliance on loans (as seen in U.S economy).
  • Adverse impacts on policies: Fincialisation may push for policies favouring predatory lending, higher risk-taking and erosion of worker protections.

 

Developing countries often face debilitating crises when financial market ‘innovations’ and growth run ahead of economic growth for e.g the Asian crisis of 1997-98. Therefore, India needs to have an orderly and gradual evolution of the financial market.

  • Tags :
  • Financial Markets
  • Financialization
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