Context:
Recently, Chief Economic Adviser V. Anantha Nageswaran warned that Financialization could distort macroeconomic outcomes and exacerbate inequality as India grows.
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- He noted that India’s stock market capitalization is about 140% of GDP and warned that this dominance could distort policy and economic outcomes.
- He stressed that financialization has led to problems like high public and private debt, reliance on rising asset prices, and increased inequality in developed countries.
- As India aims to become a developed nation by 2047, he advised avoiding these pitfalls.
About Financialization
- Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes.
- Financialization transforms the functioning of economic systems at both the macro and micro levels.
Reasons Behind Financialization
- Deregulation and Globalization: The fall of Bretton Woods and 1980s neoliberal policies boosted financialization by encouraging free trade and capital flow, increasing global liquidity.
- Shift from Industrial Capitalism: Financialization arose as economies moved from manufacturing-based models to ones dominated by financial markets.
- Increased Liquidity: Deregulation and technological advancements have created greater liquidity in financial markets, enabling more credit extension and investment opportunities.
- Changes in Economic Policy: Policies like deregulation and tax cuts for the wealthy are seen as favoring financial interests.
Impacts of Financialization
- Increased Financial Fragility: The rising reliance on debt has led to greater financial instability, as seen in past financial crises and the subprime mortgage crisis.
- Debt Concerns: Rising household and corporate debts indicate unsustainable growth and increased risk of economic downturns due to potential debt-deflation and prolonged recessions.
- Income Distribution: Financialization has led to a disconnect between wages and productivity, contributing to wage stagnation and growing income inequality.
- Changes in Economic Behavior: Financialization has altered both household borrowing habits and corporate behaviors, influencing overall economic performance and policy decisions.
- Tepid Economic Growth: The era of financialization is linked to slower economic growth and reduced investment spending.