
India’s Economic Surveys deserve a lot more attention than they usually get

Summary
- The note of caution against the dangers of excessive financialization in the 2024-25 Economic Survey needs to be mulled over. Financial sector excesses can indeed hurt the real economy.
Economic Surveys tend to have a short shelf life. This could be because they are seen as the handiwork of technocrats, led by the chief economic advisor, and often read like academic wish-lists, devoid of the political economy considerations that determine whether governments take their advice.
It could also be because the Union budget follows soon after, taking everyone’s attention away. Whatever the reason, Economic Surveys rarely enjoy more than a brief moment in the sun. This is unfortunate. Many of the ideas that helped lift India’s trajectory of economic growth—such as the case for lower tariffs and privatization—were first mooted by these surveys. All of which means that the views expressed in the Economic Survey 2024-25 deserve careful consideration.
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The latest survey cautions against the “risk of financialisation"—or the “dominance of financial markets in shaping policy and macroeconomic outcomes"— and of “asset price bubbles that are now endemic in the West." It argues that some of the measures taken by regulators were not only designed to ensure systemic stability, but were akin to “welfare measures" aimed at “reining in excessive and financially ruinous speculation."
Stock market aficionados might see that as an attempt to curb speculative activity, an integral part of the price-discovery process in a free-market economy.
But that would miss the wood for the trees.
The survey does not seek to end speculation, but rather to ensure that it does not run ahead of the real economy. Capital markets must remain rooted in macro fundamentals. These markets, it notes, are central to India’s growth story, catalysing capital formation for real economic activity, enhancing the financialization of domestic savings and enabling wealth creation. Taken to an excess, however, it can hurt the economy.
An example is the financial overrun that led to the global financial crisis of 2008-09. Its key cause was “uninhibited financial sector growth," thanks to the wisdom of the day that finance as a sector performs best when it is left largely to its own devices.
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To sustain the sector’s growth without engendering a crisis, it argues that regulators must be sensitive to the nuanced relationship between this growth and the real economy. A well developed financial system reduces transaction costs, lets prices emerge efficiently and channels the flow of capital into innovative and risky ventures. But there is an “inflexion point at which financial development switches from propelling growth to holding it back."
Research by the Bank for International Settlements (BIS), for instance, shows how Ireland’s steep rise in the ratio of private credit-to-GDP from 90% in the 1990s to 150% in 2007 shaved 0.5 percentage points off its productivity growth. This holds clear parallels with India, where household debt has been steadily rising. It rose to 42.9% of GDP in the second quarter of 2024, as against an average of below 37.5% of GDP from 2007 to 2024, according to the BIS.
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True, we are nowhere near Irish levels, but then, low incomes across India mean lower payback capacity, which results in greater vulnerability to debt traps. In the survey’s view, we must strive for a finely held balance between financial-sector development and growth on one hand and financialization on the other, with the financial savings of households, our needs of investment and levels of literacy on matters of finance all kept firmly in mind. Now, that’s sound advice.