V Anantha Nageswaran, Chief Economic Advisor
“Unprecedented levels of public and private sector debt, some visible to regulators and some not, economic growth dependent on continued increase in asset prices to offset the leverage that have built up and hence a massive surge in inequality. India must be wary of these outcomes and avoid this trap,” Chief Economic Advisor (CEA) V Anantha Nageswaran said
Mumbai: India has one of the brightest global economic growth prospects, Chief Economic Advisor (CEA) V Anantha Nageswaran said on Monday, cautioning that the country needs to avoid ‘financialization’ as it marches towards the goal of becoming a developed nation by 2047.
India’s stock market capitalization is around 140 per cent of the GDP, he said, adding, the record profitability of the Indian financial sector and high levels of market capitalization, or the ratio of market capitalization to GDP, give rise to another phenomenon which deserves closer examination.
“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. I am referring to the phenomenon called financialization, or the financial market’s dominance of policy and macroeconomic outcomes,” he said.
Financialization is the dominance of financial market expectations trends, and importantly, interest in public policy and macroeconomic outcomes, he said at CII Financing 3.0 Summit here while making a disclaimer that these are his personal views and not as CEA.
As India looks ahead to 2047 with optimism and hope, he said, this is something it has to avoid, because the consequences of such financialization is there for all to see in the developed world.
“Unprecedented levels of public and private sector debt, some visible to regulators and some not, economic growth dependent on continued increase in asset prices to offset the leverage that have built up and hence a massive surge in inequality. India must be wary of these outcomes and avoid this trap,” he said.
Developed countries are encountering these challenges after they have become materially prosperous, he said, adding per capita, India is just 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 the financialization and its ramifications that afflict advanced societies. In other words, we cannot afford to let the tail wag the dog,” he said.
Observing that retaining policy autonomy and space to insulate the economy from the vagaries of global capital flows is critical, Nageswaran said India relies on global capital flows despite modest current account deficit.
“India 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 that to our advantage in carving out policy space for ourselves,” he said.
In short, he said, the country has to find a fine balance between national imperatives and investor interest or preferences.
Of course, he said, “it also means becoming a global agenda setter, rather than an agenda taker. That will be a good thing. While some actions can be initiated now, such as, for example, an Indian entity making the effort to become a global credit rating agency, the outcome and the impact will take much longer to materialize.”
“Economic size and economic clout will influence our ability to become a global agenda setter, and that, in turn, will favourably impact our economic performance. We have to work on both, therefore simultaneously, but agenda setting aspirations cannot run ahead of acquiring economic strength, size, heft and vitality,” he said.