This chapters examines the paradox that despite India having experienced high economic growth for some time now, substantial income increases have not been enjoyed by lower-income groups. This is explained in part by employment growth being meagre in relation to output growth, and a lack of initiatives from the state to provide social benefits. Taking into account the large share of the informal sector in India and the structural evolution of the economy, the chapter argues that conventional tight monetary and fiscal policies in India have combined with deregulation of finance to produce a poor record of job creation. A proper explanation of the situation requires both Keynesian aggregate demand analysis and analysis of the structural change in the economy.
Financial markets rest on the proliferation of credit, not just within formal, regulated banking channels, but also along unregulated, or shadow, banks. Unlike regular banks, shadow banks function beyond the jurisdiction of the monetary authorities. While decisions to lend and borrow are subject to risks which are systemic and unquantifiable, transactions on the part of the unregulated banks can further exacerbate these risks by encountering new types of risk within informal credit channels. Given that these channels, while providing additional credit, often lead to excess risks for lenders, additional charges are levied on borrowers. Thus there arises a need to enquire into the pattern of these credit channels, especially in developing countries where large sections of borrowers cannot afford the high cost of such loans.
The narrative as well as the analysis of deregulated finance in the global economy remain incomplete unless one relates to the surges as well as volatility in capital flows which are experienced by the emerging economies. An analysis as above needs to consider the implications of capital flows in those economies, especially in terms of the ‘impossibility’ of adopting monetary policies which benefit growth in the national economy. There is also a need to recognise the role of uncertainty and the related changes in market expectations in the (precautionary) accumulations of the large official reserves as are held by these countries. The consequences are found to affect the fabric of growth and distribution in these economies. Recent experiences of China and India, with their deregulated financial sectors, bear this out.
Financial integration and free capital mobility, which are supposed to generate growth with stability in terms of the ‘efficient markets’ hypothesis, have failed, and not only in the advanced economies but also in the high-growth developing economies like India and China. Deregulated finance has led these countries to a state of compliance, where domestic goals of stability and development are sacrificed to make way for the globally sanctioned norms relating to free capital flows.
With the global financial crisis and the spectre of recession haunting most advanced economies, issues as above in the high-growth economies in Asia have drawn much less attention than they deserve. This oversight leaves the analysis incomplete by ignoring the structural changes that result in these developing economies — which are of much relevance to the pattern of financialisation and turbulence in the global economy as a whole.
Sunanda Sen and Zico Dasgupta
Financialisation creates space for transactions in the financial sector of economies, and, in doing so, helps to raise the share of financial assets in the portfolios held by market participants. Largely driven by deregulation, the process works to make financial assets relatively attractive as compared to other assets, by offering both better returns and potential capital gains. Against the backdrop of the prevailing analysis of corporate investments under financialisation in the advanced economies, this paper attempts to analyse the pattern of investment by corporates in an emerging economy like India during the 2000s. By analysing the sources and the use of funds of India's corporate sector in further detail, this paper highlights a similar phenomenon of financialisation in the Indian economy which, ceteris paribus, adversely affected real investments during the 2000s along with a process of Ponzi financing during the post-crisis period.