Financial Boom at a Time of Economic Stagnation

Context: The paradox of the continuing financial boom while the economy is going through a stagnation, has been found in many developed and developing countries including India.

Concerns with a financial boom:

• Paradoxical relationship with economic growth: The Bombay Stock Exchange (BSE) Limited grew from 40817 on January 8, 2020, to 48569 a year later, on January 8, 2021. This was despite the pandemic
  • Declining growth: India’s growth rate in real terms sank to a low of minus 23.1%.
  • Continuing financial boom while rising unemployment across countries: e.g. in Brazil, Argentina, USA, and the U.K.
• Acting as Fictitious capital:
  • They have no counterpart in the productive sector (first identified by Karl Marx) as they consist of credit in circulation, bonds based on future earnings, interest on loans.
  • Earnings include interests, dividends and capital gains, and profits on derivatives such as forwards and futures used to hedge against uncertainty in deregulated markets.
  • They generate financial wealth for those with access to the financial circuit.
  • Low-interest prices, while helps in expanding the economy, also yield higher stock prices.
  • Driven by market confidence: The market may suddenly stall when expectations turn adverse.
    • E.g. The financial collapse with the dot-com bubble or the sub-prime crisis of 2008, inflicting high social costs of unemployment and poverty in the real economy.

State regulation of Finance in India: Finance as the major force in power relations -

• Financial deregulation in the late-1990s: allowed banks to earn profit by dealing with securities and with the emergence of hedging devices such as futures and options in the market.
• Rise of Non-Bank Financial Institutions as well as shadow banks: operating beyond regulations even at cost for the regular banks which had large exposures to the non-banks.
• Pro-finance stance of the state: through bailouts in the name of restoring financial stability.

Conclusion: Above concerns highlight the need for alternative policies on the part of the state and a bit of caution on the part of individual investors, in a bid to usher in a sustainable and equitable path of growth for the economy as a whole.