‘Be wary of market financialisation’

Contact Counsellor

Last Updated04/09/2024

In a thought-provoking address at the CII Financing 3.0 Summit, Chief Economic Adviser (CEA) V. Anantha Nageswaran expressed concerns about the potential risks of financialisation in India’s economy.
His caution comes amid a backdrop of record profitability in the Indian financial sector and a stock market capitalization that stands at approximately 140% of the country's GDP.
Concurrently, SEBI Chief Madhabi Puri Buch announced new investor-friendly initiatives, including a reduced minimum for Systematic Investment Plans (SIPs).

Dr. Nageswaran’s remarks centered on the increasing dominance of financial markets in shaping public policy and its potential to distort macroeconomic outcomes. He highlighted that while the current growth in capital markets has been beneficial, the rapid financialisation of the economy could lead to unintended consequences similar to those observed in advanced economies. These include:
High Public and Private Debt: Excessive financialisation can drive both public and private sectors to accumulate unprecedented levels of debt, which could destabilize the economy.
Asset-Price Inflation: Economic growth that becomes overly reliant on rising asset prices is vulnerable to volatility, making the economy susceptible to financial shocks.
Inequality: A surge in financial market activity without corresponding growth in the real economy can exacerbate income and wealth inequality, as financial gains often concentrate among the already wealthy.
Dr. Nageswaran emphasized that India, currently transitioning into a lower middle-income country, must tread cautiously to avoid falling into these traps.

While Dr. Nageswaran raised concerns about the broader economic implications of financialisation, SEBI Chief Madhabi Puri Buch focused on making financial markets more accessible and transparent for investors. One of the key announcements at the summit was the introduction of a new minimum for SIPs.
SIP Accessibility: Investors will soon be able to start SIPs with as little as ₹250 per month. This initiative is expected to democratize investment opportunities, allowing more individuals to participate in the capital markets with minimal financial outlay.
Technological Advancements: Buch also highlighted the ongoing efforts to streamline disclosures by listed companies. In the near future, a single disclosure on one stock exchange will be automatically uploaded to the other bourse, enhancing transparency and reducing the compliance burden on companies.
Innovative Financial Products: Addressing the issue of Real Estate Investment Trusts (REITs), Buch hinted at the regulatory challenges and conflicts of interest, particularly in light of recent allegations against her by the Hindenburg report.