India to Circumvent Financialization in Its Journey to Viksit Bharat

India's economic growth prospects are among the brightest globally, according to Chief Economic Advisor V Anantha Nageswaran. However, he cautioned against financialization as India aims to become a developed nation by 2047. Financialization refers to the dominance of financial markets in public policy.

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India's stock market capitalization is around 140% of GDP. Nageswaran highlighted that the high profitability of the financial sector and elevated market capitalization levels warrant closer scrutiny. He explained that when the market surpasses the economy, it can unduly influence public and policy discourse.

Financialization Concerns

Nageswaran elaborated on financialization at the CII Financing 3.0 Summit, noting that it involves financial markets dominating policy and macroeconomic outcomes. He stressed that these views were personal and not reflective of his official stance as CEA.

He warned that as India looks towards 2047 with optimism, it must avoid the pitfalls of financialization seen in developed nations. These include high public and private sector debt, economic growth reliant on asset price increases, and rising inequality.

Developed countries face these issues after achieving material prosperity. Nageswaran pointed out that India is just entering the lower middle-income category per capita. Therefore, India must avoid financialization and its negative consequences.

Policy Autonomy and Global Capital Flows

Nageswaran emphasized the importance of retaining policy autonomy to shield the economy from global capital flow fluctuations. Despite a modest current account deficit, India relies on these flows. He stated, "India has one of the brightest global economic growth prospects. It is up to us to sustain it."

He added that balancing national imperatives with investor interests is crucial. Becoming a global agenda setter rather than an agenda taker would be beneficial for India.

While some actions can be initiated now, such as an Indian entity becoming a global credit rating agency, their impact will take time to materialize. Economic size and clout will influence India's ability to set global agendas and improve economic performance.

Capital Formation and Credit Growth

Nageswaran mentioned a decline in capital formation due to elections and monsoons but noted improvements in private sector capex funding and government spending. He stressed the need to focus on employment generation and consumption growth.

Addressing concerns about deposits moving away from banks, he said money invested in financial securities would return to the market eventually.

Corporate Bond Market Development

SBI Chairperson C S Setty emphasized developing the corporate bond market. Non-bank financial institutions like insurance companies, mutual funds, and pension funds should participate to channel more capital into the market.

Setty also addressed stagnant deposit growth in banks, stating that credit growth should come from diverse financial sector players, not just banks. She highlighted the need for universal banks to innovate in delivering products and handle credit for new sectors like battery storage and hydrogen.

Technological Advancements

Ashishkumar Chauhan, Managing Director & CEO at National Stock Exchange, stressed adopting new technologies that add value with minimal capital. These technologies will play a significant role in India's capital market growth.

CII Director General Chandrajit Banerjee noted that financial institutions are crucial in supporting small, mid-sized enterprises, and micro-industries. Addressing challenges like green financing, digital transformation, and ESG criteria is essential for SMEs' success.

Sanjiv Bajaj, Past President of CII and Chairman & Managing Director of Bajaj Finserv, underscored enhancing credit availability, spreading financial markets, and deepening the corporate bond market. He emphasized fostering harmony between regulators to ensure robust yet innovative policies.

Nageswaran concluded by stating that while India has bright economic prospects, it must carefully navigate financialization risks to achieve sustainable development by 2047.