The Rise of Financialisation in India: Risks and Recommendations

What Is Financialisation?

Financialisation is a term that describes a transformation in the management of savings and investments. This shift sees a considerable amount of household savings moving from traditional avenues like fixed deposits or savings accounts to riskier assets, such as stocks and mutual funds.

Why Is This a Concern for India?

• India, classified as a lower-middle-income country, is experiencing an increasing number of individuals investing in risk-laden assets. In 2022, 17.8% of savings were allocated to such assets, contrasting with 15.7% in 2019.
• There is a growing concern that an over-reliance on financial markets could jeopardize economic stability, particularly if both public and private debt continue to rise unchecked.

What Are the Risks?

• Policy Influence: An excessive focus on financialisation can result in public policies that prioritize asset markets over crucial economic development initiatives.
• Inequality: As asset prices surge, the gap between different socio-economic classes may widen, given that not everyone has equal access to financial markets.
• Market Volatility: The economy could become excessively reliant on the performance of the stock market, leading to periods of instability.

What Does India Need to Do?

• It is imperative to strike a balance between the growth of the financial sector and the overall economic stability.
• The banking sector needs to be reinforced to adequately meet capital requirements and fulfill primary credit functions.
• Enhancing financial literacy among households is essential to empower individuals to make informed investment decisions.