India has one of the brightest global economic growth prospects, Chief Economic Advisor (CEA) V Anantha Nageswaran said on Monday as he cautioned against 'financialization', which refers to the dominance of the role of financial markets in public policy, as India marches to become a developed nation by 2047.

India's stock market capitalization is around 140 per cent of the GDP, he said, adding, the record profitability of the Indian financial sector and high levels of market capitalization, or the ratio of market capitalization to GDP, give rise to another phenomenon which deserves closer examination.

"When the market becomes bigger than the economy, it is natural, but not necessarily reasonable, that the considerations and priorities of the market dominate the public discourse and also influence the policy discourse. I am referring to the phenomenon called financialization, or the financial market's dominance of policy and macroeconomic outcomes," he said.

Financialization is the dominance of financial market expectations trends, and importantly, interest in public policy and macroeconomic outcomes, he said at CII Financing 3.0 Summit here while making a disclaimer that these are his personal views and not as CEA.

As India looks ahead to 2047 with optimism and hope, he said, this is something it has to avoid, because the consequences of such financialization is there for all to see in the developed world.

"Unprecedented levels of public and private sector debt, some visible to regulators and some not, economic growth dependent on continued increase in asset prices to offset the leverage that have built up and hence a massive surge in inequality. India must be wary of these outcomes and avoid this trap," he said.

Developed countries are encountering these challenges after they have become materially prosperous, he said, adding per capita, India is just stepping into the lower middle income category.

"Therefore, as we deliberate on preparing our financial system to support our economic aspirations, India can ill afford the financialization and its ramifications that afflict advanced societies. In other words, we cannot afford to let the tail wag the dog," he said.

Observing that retaining policy autonomy and space to insulate the economy from the vagaries of global capital flows is critical, Nageswaran said India relies on global capital flows despite modest current account deficit.

"India has one of the brightest global economic growth prospects. It is up to us to sustain it, and it is also up to us to use that to our advantage in carving out policy space for ourselves," he said.

In short, he said, the country has to find a fine balance between national imperatives and investor interest or preferences.

Of course, he said, "it also means becoming a global agenda setter, rather than an agenda taker. That will be a good thing. While some actions can be initiated now, such as, for example, an Indian entity making the effort to become a global credit rating agency, the outcome and the impact will take much longer to materialize." "Economic size and economic clout will influence our ability to become a global agenda setter, and that, in turn, will favourably impact our economic performance. We have to work on both, therefore simultaneously, but agenda setting aspirations cannot run ahead of acquiring economic strength, size, heft and vitality," he said.

Emphasizing the need to develop corporate bond market, SBI Chairperson C S Setty noted that it is essential for non-bank financial institutions, such as insurance companies, mutual funds, and pension funds, to participate in the corporate bond market to help channel more capital into the market.

Addressing concerns about stagnant deposit growth in banks and its impact on credit expansion, Setty said that credit growth should be driven by a diverse range of financial sector players, and not just banks.

Highlighting the need to develop skillsets within the universal banks to handle credit to new sectors, Setty said, "We need to continuously innovate in terms of delivering the products. When it comes to the complex models of corporate financing, especially in the new emerging areas like battery storage, hydrogen, etc., they also require capital going forward." "While we expect much of the capital to come from overseas to support the domestic capital formation, universal banks, particularly large banks, are expected to play an important role in infrastructure financing," he added.

Ashishkumar Chauhan, Managing Director & CEO at National Stock Exchange said it is critical to look forward to adopting newer and fast-moving technologies that add a huge value with a little capital and will play a major role in the growth of capital markets in India.

He emphasized that by preventing excessive corporate debt and leveraging new technologies that enable innovation and significant wealth creation with minimal capital, the capital markets can play a greater role.

Stating that the role of financial institutions is crucial in supporting not only small and mid-sized enterprises but also micro-industries, helping them become more competitive and seamlessly integrated into the supply chain, CII Director General Chandrajit Banerjee said that for India's SMEs to succeed, addressing challenges such as green financing, digital transformation and ESG criteria is essential.

Sanjiv Bajaj, Past President of CII and Chairman & Managing Director, Bajaj Finserv, underscored the need to enhance credit availability, increase the spread of financial markets, and further develop and deepen the corporate bond market.

He emphasized the importance of fostering greater harmony between various regulators to ensure that policies, while robust, also allow for innovation and are aligned.

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