The Union Budget 2025 shifts fiscal focus to the debt-to-GDP ratio, targeting a decline to 50% by 2031. This approach emphasizes fiscal transparency and operational flexibility, balancing growth-enhancing expenditures with long-term economic stability while moving away from rigid annual deficit targets toward a more reliable measure of fiscal performance.
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The Economic Survey warned against excessive financialisation.
The Economic Survey defines “excessive financialisation” as the rapid growth of financial markets and products that outpace the real economy’s needs.
They survey warns that this can lead to complex, risky financial instruments, divert resources from productive sectors, and increase systemic risks, as seen during the 2008 global financial crisis.
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The Survey highlights the 2008 crisis as a warning tale of excessive financialisation. Reckless lending, over-securitization, and the proliferation of risky financial products led to a catastrophic collapse. It underlines the need for careful regulation to prevent similar crises in India. |
Excessive financialisation competes with the real economy for resources like capital and skilled labor. It often prioritizes high-collateral, low-productivity projects (e.g., construction) over innovative, high-risk ventures. This misallocation of resources can lead to financial instability and hinder long-term economic growth.
Role of financial markets in economic growthThe Survey acknowledges that financial markets play a crucial role in economic growth by reducing transaction costs, facilitating price discovery, and channeling capital into innovative activities. However, it warns that financial markets must grow in couple with the economy’s capital needs, not outpace them. |
Complex financial products, usually a result of excessive financial engineering, can hide risks and mislead consumers. These products increase the likelihood of financial crises, as seen in 2008 when irresponsible lending and mortgage securitization triggered a global collapse.
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The Survey emphasizes that a well-functioning financial system can reduce poverty and inequality by enabling consumption smoothing, shock absorption, and access to credit for households and firms. It also supports economic activities that create jobs and boost incomes. |
The Survey notes that while finance drives growth, there is a tipping point beyond which excessive financial development hinders economic progress. For example, rapid private credit growth in countries like Ireland and Thailand reduced productivity, therefore there is a need for balanced financial expansion.
The Survey recommended to ensure financial markets grow align with the real economy’s needs, avoiding speculative bubbles. It stressed robust regulation to curb complex, risky products and advocated for finance to prioritize poverty reduction, inequality mitigation, and shock absorption for households.
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PRACTICE QUESTION Q.Why has the Economic Survey warned against excessive financialization? A) It diverts resources from the real economy B) It leads to economic stability and sustainable growth C) It ensures financial markets always grow faster than the economy D) It minimizes the risks of financial crises Answer: A Explanation: The Survey warns that excessive financialization causes the financial sector to compete with the real sector for skilled labor and resources, potentially harming economic growth. |
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