At a time when India’s stock market capitalisation has touched 140 per cent of GDP, 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, Chief Economic Advisor (CEA), V Anantha Nageswaran, said today.

“As India looks ahead to 2047 with optimism and hope, this is something it has to avoid because the consequences of such financialisation are there for all to see in the developed world,” he said at the CII Financing summit held here today. (The dominance of the financial market over policy and macroeconomic outcomes is referred to as financialisation. )

The CEA said globally, the unprecedented levels of public and private sector debt, some visible to regulators and some not, and economic growth being dependent on continued increase in asset prices to offset the leverage that has built up, has led to a massive surge in inequality. India must evade all these outcomes and avoid this trap.

“Developed countries are encountering these challenges after becoming materially prosperous. Per capita wise India is just about stepping into the lower middle-income category. Therefore, as we deliberate on preparing our financial system to support our economic aspirations, India can ill-afford financialisation and its ramifications that afflict advanced societies,” the CEA said.

Financial sector sensitivity

It is important to remember that the financial sector shoulders much higher responsibility than other sectors. What happens in the financial sector has a broader impact throughout the economy and beyond.

Equally important is to retain policy autonomy to insulate the economy from the vagaries of global capital flows. With a modest current account deficit, India relies on global capital flows, but it also has one of the brightest global economic growth prospects.

“It is up to us to sustain it, and it is also up to us to use them to our advantage in carving out policy spheres for ourselves,” the CEA said, adding that India must strive towards becoming a global agenda-setter rather than an agenda-taker. While some actions can be initiated now, including an Indian entity being referred to become a global credit rating agency, the outcome and the impact will take much longer to materialise.

Developing corporate bond market

Furthermore, during a panel discussion, Bajaj Finserv MD, Sanjiv Bajaj, and State Bank of India Chairman, CS Setty, also called for deepening the corporate bond market, and developing more financial services companies that can scale globally.

Bajaj said the financial institutions must fill the MSME sector’s credit gap of Rs 25 trillion. Setty, meanwhile, said while lenders seem to be gaining confidence lending to the MSME sector due to formalisation, MSMEs should themselves take a few more steps to further scale lending in the sector. These include improving their governance, technology structures and enhanced market linkages.

“We will need greater harmony between our regulators to ensure that our policies while robust, allow for innovation and are aligned,” Bajaj said.

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