MUMBAI: Cautioning against the many perils that over-financialisation can bring about to the real economy, the chief economic advisor to the government, V Anantha Nageswaran said that the financial sector should be the servant of the real economy and not the other way around. Or else we can also face the perils that the world was engulfed during 2007-08 in the form of the global financial crisis that originated in the Western world, he added.
Stating that financial markets are not the most reliable barometer of risks and rewards, and cannot be trusted to direct available savings to its most efficient applications, he said “When the market becomes bigger than the economy, it is natural, but not necessarily reasonable that the considerations and priorities of the market dominate the public discourse and also influence the policy discourse.”
"What calls this phenomenon is financialisation or financial market dominance of policy and macroeconomic outcomes. In brief, financialization is the dominance of financial market expectations trends in public policy and macroeconomic outcomes,” he said, while addressing a financing summit organized by the industry lobby CII here on Monday
Further explaining the issue, he said, as we head to become a developed market by 2047, “this is something we have to avoid, because the consequences of such financialization is there for all to see in the developed world in the form of unprecedented levels of public and private debt and the attendant issues arising out of them such as a massive surge in inequality or income disparities.”
We must be wary of these outcomes and avoid this tract. Developed countries are encountering these challenges after they have become materially prosperous, but we are just about stepping into the lower middle income status. Therefore, as we prepare our financial system to support our faster growth, we can ill-afford the financialization and its ramifications that afflict advanced societies, Nageswaran warned.
To avoid such a trap, he said that we must always ensure that the dog is always ahead of the tail by having a proper policy approach to financial innovations and compensation in the financial sector because they are interrelated in the 2012 crisis in the global financial crisis' aftermath.