 "Economic Survey 2024-25: Excessive financialisation can hurt economy")
The Economic Survey of 2024-25, tabled in Parliament on Friday, has identified financialisation as a risk and said such a phenomenon has resulted in unprecedented levels of public- and private-sector debt in developed economies.
“One critical risk to guard against is the dominance of financial markets in shaping policy and macroeconomic outcomes, a phenomenon known as ‘financialisation’,” the Survey said.
The report said India should strive to maintain a fine balance between financial-sector development and growth, on the one hand, and financialisation, on the other, as the country was trying to align its financial system with its economic aspirations for 2047.
The report said the financial sector was undergoing a transformative period marked by several emerging trends, and noted there was an increase in the share of consumer credit in loans of banks and a rise in non-bank financing options.
“The Indian financial sector is currently at a pivotal moment. The traditional dominance of banks in providing credit is beginning to decline, and other participants and products in the financial sector are increasingly filling this role,” it said.
The report noted the sharp rise in the share of consumer credit in overall loans extended by banks. Between FY14 and FY24, the share of consumer credit in the total increased from 18.3 per cent to 32.4 per cent.
At the same time, banks’ share in credit declined from 77 per cent in FY11 to 58 per cent in FY22.
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Observing that the credit-to-GDP ratio was a good metric to evaluate where an economy stood in the financial cycle, the Survey said despite double-digit growth in bank credit after April 2022, the ratio was below the trend line, indicating that recent growth in bank credit was sustainable.
The report also highlighted the risk of using artificial intelligence (AI) in the banking system.
“Lack of transparency can lead to trust concerns and challenges in validating the fairness and accuracy of AI decisions, making it challenging to audit or interpret the algorithms that drive the decisions.”
Some other risks emanating from increasing AI usage were cited, such as human resources risk, cyber risk and third-party dependencies, and service-provider concentration.
For India to achieve 7-8 per cent growth over the next decade, the Insolvency and Bankruptcy Code (IBC) needs to evolve and improve, the report said.
“The next step towards IBC reform is to improve operational efficiencies to speed up the resolution process, especially important for MSMEs (micro, small, and medium enterprises), for whom legal costs can prove to be substantial,” it said.
On the corporate-bond market, the report said in April-December 2024, the market gained significant traction, with the value of corporate bond issuances at Rs 7.3 trillion.
The average monthly issuance was Rs 80,000 crore, higher than the average of Rs 66,000 crore in the corresponding period of the previous year.
According to the Survey, private placements remained the preferred channel for companies, accounting for 99.1 per cent of what was mobilised through the bond market.
“An overwhelming majority of corporate bond issuance happens through the route of private placement, which actively deters the participation of retail investors,” the Survey noted.
In FY24, while the public placement of corporate bonds stood at Rs 19,000 crore, private placement was around Rs 8.38 trillion.
The Survey said insurance received the highest foreign direct investment (FDI) in services during April-September FY25. The segment rang up more than 62 per cent of the $5.7 billion worth equity inflows into the services sector. This was followed by the financial sector, which received 18 per cent.
FDI equity inflows in the first half of FY25 stood at $29.8 billion.
Insurance was opened up for foreign investors with an FDI limit up to 26 per cent in the year 2000. The limit was increased to 49 per cent in 2015 and 74 per cent in 2021.
What survey points out
* Indian financial sector is undergoing a transformative period
* Between FY14 and FY24, the share of consumer credit in the total increased from 18.3% to 32.4%
* Banks’ share in total credit has declined from 77% in FY11 to 58% in FY22
* Lack of transparency can lead to trust concerns and challenges in validating the fairness and accuracy of AI decisions
* For India to achieve 7–8% growth rate over the next decade, the IBC needs to continuously evolve and improve