Ananth Nageswaran, the Chief Economic Adviser to the Central Government, is an eminent economist and is known for his moderate but erudite expressions. In spite of being in government service, extreme moderation and neutrality should be exercised so as not to be known as the government’s cheerleader. She will be abundant with Ananth Nageswaran. In the current clamor of Aarti on one side and Tikarati on the other, it is therefore necessary to take note of the opinions expressed by persons like Ananth Nageswaran. He presented some important points at a seminar on finance organized by ‘Confederation of Indian Industry’ (CII) in Mumbai. Before commenting on it, it would be helpful to give some statistics in this context to understand the point raised by Nageswaran.

The most important detail of this is the common valuation of the Indian capital market. That is the market capitalization factor. The shared valuation of our capital markets is currently more than 140 percent of our gross national product (GDP). That means the size of our capital market – i.e. stock market – is roughly one and a half times the size of the Indian economy. The benefits and returns in this sector are eye-opening. In the last four years, the number of investors in the Indian capital market has increased to more than 9.2 crores, which means that about 20 percent of the households in the country invest money in the capital market. This market was once dominated by institutional investors. That is, banks, financial institutions invest heavily in the stock market. This means that the amount of money of individual, retail investors in the market is reduced. This is no longer the case. According to the details in the latest Economic Survey Ahlawala, the proportion of retail investors in the capital market has gone up to 36 percent and it seems to be increasing day by day. In order to buy and sell mutual funds, shares, one must have a Demat (dematerialization) account. Last year, the number of such account holders was 11.45 lakh. This year it has gone up to 15 crores 14 lakhs. And when all this? While the saving rate of Indians is decreasing day by day. It means straightforward. Recently, instead of keeping money in bank deposits, savings accounts etc., Indians have started investing it in the capital market. As a result, our savings rate last year was the lowest in five decades. Indians invested 5.1 percent of their gross national product in savings. Earlier this ratio was 7.2 percent. At the same time, India’s indebtedness stood at 3.8 percent of the gross national income last year. The Reserve Bank says it has now gone down to 5.8 percent. Loksatta (September 26, 2023) commented on the declining savings in its editorial ‘Bachat Bargal’. It refers to Nageswaran’s latest assertion.

This is because “when the size of the capital market becomes several times the gross national income of the country, there is a risk of ‘financialization’ of the economy. We should avoid it”, said Nageswaran. In such an environment all the focus is on the capital market and its turnover. A symptom of this ‘disease’ is the rising capital market index for the past few months. In fact, according to the Center’s own survey last week, the Indian economy slowed down relatively in the current quarter. We only grew by 6.7 percent when the average growth was expected to be seven percent or faster. The irony of this is that while the country’s economy was slowing down, the stock market hit record highs on the same day. Sensex crossed the 82 thousand mark for the first time. This is exactly what Nageswaran worries about. “Fiscal policymakers run the risk of falling under the influence when everything becomes market-oriented.” It means that when everything becomes market-centric, private and public debt also increases massively and inequality widens.

Nageswaran’s statement on what should be done to prevent this should be taken into account. “The market should be the slave of the real economy”, his advice is very suggestive. Expanding it reveals the fact that growth in engineering, manufacturing and employment-oriented industries rather than capital market inflation is the true expansion and proper development of the economy. If nothing happens and the Sensex only goes up, the illusion of reality starts to set in and the illusion of economic progress starts to be taken for granted. There is only one thought behind investing in the capital market. Greater returns. Although some get such returns for some time in the initial investment cycle. Attracted by their fake stories, others rush to the market for more returns. However, if there is not a healthy expansion of the economy on the ground, sometimes there is a limit to how much the market alone can provide, and when it does, it all comes down to a mess. “When the market becomes larger than the economy, it is natural that the needs and priorities of these markets are imposed on the economy. This ignores the real challenges and increases indebtedness. This is a trap, we should avoid it”, clearly states Nageswaran. To do so is to make the tail wag the dog instead of the tail wagging the dog, he believes. We are not the only ones at risk.

He gave evidence that this has happened and is happening in developed and other developing countries as well. His comments about the developed countries are important. Nageswaran said, “Such a situation arose in those countries when sufficient subsistance spread far and wide.” That is, in America and European countries, the citizens became really rich with the development of ‘real’ economy, and many sections of the society benefited from it due to extensive wealth creation. “…but where we are right now in the low-income bracket,” Nageswaran realizes, and suggests that the mere market bubble may eventually collapse. Therefore, according to him, India should avoid falling under the influence of ‘market’ bubbles. “If a developed India is the goal, it is essential to avoid this trap,” he asserted earnestly.

If this warning is being given by the Central Economic Adviser itself, it should be taken into consideration. Especially recently, the disorder of seeing/hearing everything rosy about the state of the economy has become so entrenched that even reality television makes the eyes of these half-wits light up. This is what happens once you get used to living in a bubble. However, it is wise to be aware that a bubble often drowns.