Impact of Financialization: View from 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.

Recent comments


5 comment

  • Maria Madi says:


    Thanks for your interesting paper on India.

    However, I would like you to clarify the sentence of your abstract. “India has few lessons to learn from the crisis”.

    Do you believe that India´s crisis of the 1990s was decisive for avoiding a deep financial crisis in the following decades ?


  • Carmelo Ferlito says:

    Your interesting paper recognizes the role of high credit in driving the recent crisis. However, there is no mention of the Austrian School perspective on this. Austrians more than others linked credit expansion with artificial credit.
    Personally I see the Austrian approach as more indicate to induce India, and other developing countries, on a growth path that does not repeat Western mistakes. Instead, Keynesian view has to be considered responsible, at least partially, for the 2007-2008 disaster. It would be worth to try something different.
    It would be good if India might re-discover the lesson of Sudha Shenoy (see, i.e., See also “The crisis in economic theory: the dead end of Keynesian economics”, by Steven Kates.

    With best regards.

  • Pushpangadan Mangari says:

    Thank you for the comments.

    My sincere apologies for the delayed response. Your mail went to my ‘spam’ folder and unfortunately, I could retrieve it only today.

    Response to Maria Madi:
    Broadly, yes. India did learn a major lesson from its BOP led 1991 crisis which, in a way, forced them to reform its economy by liberalizing, privatizing and globalizing it. India realized, thanks to Iraq war, that its trade deficits driven mainly by its import bill for fuel, cannot be sustained by its exports (predominantly to Easter Europe, which came down significantly by the happenings in the then USSR), and foreign remittances from its non-residents. With reserves for less than 3 weeks imports, India had a precarious situation in 1991 and it had to attract foreign capital to avoid a default. It did it through a significant devaluation of its currency coupled with pledging of gold reserves, and simultaneously initiated a string of reforms.

    As a result of these first generation reforms, the ‘permit raj’ was mostly removed. Businesses got more freedom for doing business. Politicians and bureaucrats’ interventions and ‘rents’ in business operations got reduced. The process, however, got slowed down later. But to its credit, it may said that the economy could withstand a serious Asian melt down in the late 1990s, relentless oil price increases from 2004 to 2008, and a severe global crisis in the 2000s. Thus the system did show a good level of improvement. However, the pause /slowdown in reforms does not augur well for the economy.

    A major concern is the fact that India’s foreign reserves are arising out of its external capital borrowings and not generated from trade surpluses. As on 31st March 2018, the Indian Foreign reserves were of the order of US$ 424 billion and it external Debt as on that date was US$ 530 billion. With trade deficits back to higher levels, the position has become challenging again. The impact is partly offset by devaluation. The country has to improve its export competitiveness, to create a sustainable FX position and better international rating. A more long lasting structural shift has to take place, by way of cost efficient or innovative products from industrial and services sectors.

    Response to Carmelo Ferlito:
    The observations are valid and noted.

    After I submitted the article, a major NBFC has defaulted in its debt payment in India, mainly due to ‘easy and excessive’ credit availed by it, and huge asset liability mismatches. The default has created some level of panic in the system, a fear expressed by the Austrian School of thought.

    The problem of excess credit is mainly fueled by the obsession for ‘high growth’ by both politicians and corporates. Having grown at high rates in the last decade, the minimum benchmark performance in terms of GDP, has gone up for Indian politicians, and for incentive driven corporate leaders, any slowdown would have a bicycle effect, with repercussions on their remunerations. So the show goes on…

  • Edoardo Pizzoli says:

    Your main question is: ‘is there a right type and level of financialization for a given country?’. I wonder if the government of India really has the chance to decide this.

  • Edoardo Pizzoli says:

    Interesting insight. Your question is: ‘Is there a right type and level of financialization for a given country?’ I wonder if the government of India really has the chance to decide on this.