Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes.
- Thus, financial intermediaries and technologies gain unprecedented influence over our daily lives.
- It also describes moving investments away from traditional, ‘physical’ asset (like real estate, gold) towards ‘financial assets’ (like mutual funds).
Factors driving financialisation
- Rising middle class with higher disposable income
- Inflation due to which households are seeking higher returns beyond fixed deposits
- Government incentives on these instruments
- Increasing digitisation and financial inclusion
Why is excessive financialisation a concern?
- Increased Inequality: Financial income is funneled to top 1% of population through equity ownership.
- Distorts functioning of economy: Profits flow increasingly from financial investments, rather than trade in goods and services.
- Thus, movements of stock market primarily determines functioning of economy instead of production of employment or rising standards of living.
- Rising Household debts: Stagnation of real wages may increase Households’ reliance on loans (as seen in U.S economy).
- Adverse impacts on policies: Fincialisation may push for policies favouring predatory lending, higher risk-taking and erosion of worker protections.
Developing countries often face debilitating crises when financial market ‘innovations’ and growth run ahead of economic growth for e.g the Asian crisis of 1997-98. Therefore, India needs to have an orderly and gradual evolution of the financial market.