Impact of Financialization: View from India
Dr Pushpangadan Mangari
Managing Director, Consultwin Solutions, India
Please cite the paper as:
Dr Pushpangadan Mangari, (2018), Impact of Financialization: View from India, World Economics Association (WEA) Conferences, No. 2 2018, The 2008 Economic Crisis Ten Years On, 15th October to 30th November, 2018
This paper has been included in the publication
“The 2008 Crisis Ten Years On: in Retrospect, Context and Prospect Paperback”
The 2007-08 crisis happened in spite of the theoretical knowledge and understanding of events that could potentially lead to such a crisis. Financialization, the trend arguably behind the crisis, has been prevalent in the advanced economies since the 1970s. Many policies, activities and players related to financialization have led to the crisis. These include accommodating monetary policies by various governments, looser lending norms practiced by international banks, shifts in corporate financing, excessive borrowings by virtually all segments of society, debt fuelled consumption, financial engineering, investments in complex financial market products, regulatory lapses, etc., and they all have contributed to the crisis in varying degrees.
India was unaffected in the 1929 crisis as it was a colony then, relatively unconnected to the world. But not so in 2007-08 crisis, by when it was a part of the globalized world. Like the financialization story, the post-independence Indian economic growth story can be categorised broadly into two phases, one prior to 1980, and the one after. In the early decades, India’s financial structure was dominated by debt, and government controlled most of the corporate equity capital. The price at which new public equity offers could be made by private firms had to be approved by the government. Blue chip companies therefore preferred raising debt rather than diluting their equity stake at prices below their intrinsic value. Commercial Banks, which had an upper hand in the Indian financial system, were not allowed to take equity stake in private companies. The largest 14 Indian banks were nationalised in 1969, and as a consequence, remaining banks decided not to grow big, for fear of nationalization. A combination of all these factors led to a slower growth of private corporate sector in India and allowed the state to have a commanding role in the economy and its resource allocation process.
India’s major set of financial reforms introduced in 1991, were triggered by a Balance of Payments (BOP) crisis in the early 1990s. These set of reforms, widely seen as a combination of liberalization, globalization and privatization, are also perceived as a shift away from import substitution to export promotion. The financial reforms created a whole new set of financial institutions in the private sector in India.
Going forward, India has few lessons to learn from the crisis and from the emerging, acceptable models of financialization. The article tries to capture some of these.