Excessive financialisation can hurt real economy: Economic Survey

The Survey has called for banks to enhance their capabilities to meet the demands of new-age households and the digital economy while maintaining their primary credit creation function.
V Anantha Nageswaran, Chief Economic Advisor, Government of India
V Anantha Nageswaran, Chief Economic Advisor, Government of India TNIE
Updated on
2 min read

Stating that financial markets must grow in line with the real economy and not faster than the economy's capital needs and overall economic growth, the Economic Survey has warned that excessive financialisation can hurt the real economy as it comes with attendant risks to the overall financial system.

The survey has also called for banks to enhance their capabilities to meet the demands of new-age households and the digital economy while maintaining their primary credit creation function.

Economic survey is the latest to flag the risks of retail investors playing on the complex derivatives products and even borrowing to invest in the market or play on the derivatives. This has led the Reserve Bank to ask bank to go slow on personal loans which finally led the regulator to impose an additional 25 percentage points risk capital on such loans, from November 2023 when it was 100%. This had unsecured loans growth plummeting to high single digits now from over 30 percent before the clampdown.

“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,” the survey said.

“Excessive financialisation can hurt the economy. The costs may be particularly high for a low-middle-income country like ours. We must prepare ourselves with appropriate regulatory and government policy measures to intervene and mitigate these risks when necessary,” the survey said.

The survey further warned that “as we strive to align our financial system with our economic aspirations for 2047, we should also strive to maintain the fine balance between financial sector development and growth on the one hand and financialisation on the other”.

The survey also said the fast growing financialisation also brings regulatory challenges and potential risks that cannot be overlooked. “One critical risk to guard against is the dominance of financial markets in shaping policy and macroeconomic outcomes, a phenomenon known as 'financialisation.' The consequences of over 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,” the survey warned.

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, the survey concludes.

Related Stories

No stories found.

X
The New Indian Express
www.newindianexpress.com