Let’s not underestimate the risk of over-financialization

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Subscribe to enjoy similar stories. India’s financial sector has grown rapidly in recent years. According to a ministry of finance press release dated 22 July, India’s market-capitalization-to-GDP ratio ranks fifth globally and primary markets facilitated capital formation of ₹10.9 trillion in 2023-24, up from ₹9.3 trillion in 2022-23.

The number of initial public offering (IPOs) increased by 66% to 272 in 2023-24, a year in which the Nifty-50 index rose by 26.8%, as against an 8.2% decline the previous year. The National Stock Exchange (NSE) investor base nearly tripled to 92 million in March 2024 from March 2020. Financial sector development is crucial for economic growth, as it lowers the cost of financial intermediation and raises the efficiency of capital allocation.

Efficient financial intermediaries provide the economy with risk-return combinations for borrowing or investing capital to augment its production potential. While the speedy development of this sector in India has yielded multiple benefits, there exist some concerns on its unbridled expansion—which could work counterproductively in the long run. A disproportionate dilation of the sector, called ‘over-financialization,’ could cast a shadow on economic growth as it runs the risk of a lurking financial crisis.

Signs of over-financialization: Manifestations of this phenomenon are visible in financial-market activity. First, there has been an IPO rush. India topped the global IPO market with 227 of them, totalling $12.2 billion, in the first eight months of 2024, while the number of IPOs globally declined during this period (the US and China had 133 and 69 respectively).