India can ill-afford the economy's over financialisation at its current stage: Economic Survey 2024

While the outlook for India’s financial sector appears bright, some areas will require focused attention going forward. The significant increase in retail investors in the stock market calls for careful consideration, said the Economic Survey 2024 report.

This is crucial because the possibility of overconfidence leading to speculation and the expectation of even greater returns, which might not align with the real market conditions, is a serious concern.

For a developing economy such as India, the financial sector needs to support the banking sector and fill the gap in capital required for the economy's growth. Therefore, the financial sector should expand at a pace that is in lockstep with economic growth. In particular, India can ill-afford the economy's over financialisation at its current development stage, the report added.

It is interesting to note that similar concerns were raised by the RBI Governor, too, a few days back.

"Households and consumers who traditionally leaned on banks for parking or investing their savings, are increasingly turning to capital markets and other financial intermediaries," Shaktikanta Das said last week, underlining the fact that slower deposit growth may create structural liquidity issues for banks.

Das also asked banks to correctly value the liquid assets, pointing out that any incorrectness can give a "false sense" of short-term liquidity resiliency which is not desirable. "Credit growth should not run ahead of deposit growth by miles. More so when banks are required to maintain CRR, SLR, LCR,", the RBI governor added.

The Economic Survey further said that the increased retail participation in financial markets and familiarity with financial products are beginning to grow in line with India’s emergence as the world’s fifth-largest economy. Therefore, firms operating in banking, insurance, and capital markets must keep the interests of the consumers in mind and improve their service quality through fair selling, disclosure, transparency, reliability, and responsiveness.

Echoing similar views, SEBI Chairperson Madhabi Puri Buch on Friday said the capital markets regulator is "compelled" to warn against speculative bets in the futures and options (F&O) segment because it has become a "macro issue", affecting the broader economy now.

Household financial savings are going into the speculative bets, belying the expectations of being used for capital formation and the youth is losing tonnes of money in such trades, Buch said.