India has one of the brightest global economic growth prospects but must steer clear of "financialisation" as it strives to become a developed nation by 2047, Chief Economic Advisor (CEA) V. Anantha Nageswaran said on Monday.
Speaking at the CII Financing 3.0 Summit, Nageswaran warned that while India's stock market capitalisation is currently around 140 per cent of its GDP, the dominance of financial markets over policy and macroeconomic outcomes—a phenomenon known as financialisation—could pose significant risks.
He emphasised that these views were his personal opinions and not those of his official capacity as CEA.
"When the market becomes bigger than the economy, it is natural, but not necessarily reasonable, that the considerations and priorities of the market dominate public discourse and influence policy decisions," he said, highlighting the need to avoid the pitfalls of financialisation, which have led to negative consequences in developed countries.
Nageswaran pointed to the challenges faced by advanced economies, including unprecedented levels of public and private sector debt, economic growth dependent on rising asset prices, and increasing inequality.
He cautioned that India, which is just entering the lower middle-income category in terms of per capita income, cannot afford to fall into the same trap.
"As we prepare our financial system to support our economic aspirations, India must avoid the ramifications of financialisation that have afflicted advanced societies. We cannot afford to let the tail wag the dog," he said.
Maintaining policy autonomy and protecting the economy from the volatility of global capital flows is crucial, Nageswaran noted.
Despite a modest current account deficit, India relies on global capital flows, making it essential to balance national priorities with investor interests.
"India has one of the brightest global economic growth prospects. It is up to us to sustain it and use it to our advantage in carving out policy space for ourselves," he said.
Nageswaran stressed that India should aspire to be a global agenda setter rather than just a follower.
He suggested that actions such as establishing an Indian entity as a global credit rating agency could be initiated now, though the impact would take longer to materialise.
"Economic size and clout will influence our ability to become a global agenda setter, which in turn will positively impact our economic performance. We must work on both simultaneously, but our agenda-setting aspirations cannot outpace our acquisition of economic strength, size, and vitality," he concluded.
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