Competition in financial sector can lead to excessive risk taking, bringing instability: CEA Nageswaran
Dec 11, 2024
Synopsis
Chief Economic Advisor V Anantha Nageswaran highlighted the need for distinct regulatory approaches for financial and non-financial sectors. He emphasized that competition in the financial sector can create instability, unlike in other sectors. Nageswaran also urged the private sector to increase hiring and balance capital-intensive growth with labor-intensive growth for sustainable economic expansion.
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Flagging his concerns, Chief Economic Advisor V Anantha Nageswaran on Wednesday said there is a need to differentiate between regulation of financial and non-financial sectors as competition in financial sector can lead to excessive risk taking and bring instability.
"We do need to make a distinction between regulation with respect to financial sector and regulation with respect to non-financial sector of the economy," Nageswaran said at the CII Global Economic Policy Forum 2024.
"In non financial sectors, excepting natural monopolies or utilities where you have to have a regulator to protect customer interest, you can expect competition to take care of much of the roles that regulators are expected to perform. So as long as you create a competitive environment as close to the theoretical perfect competition, then you are fine," said the Chief Economic Advisor to Government of India.
He said in non-financial sector, except in case of natural utilities where one needs a regulator to protect customer interest, competition or market forces will take care of what the regulators do.
In financial sector, regulators have the tendency to lean towards excessive regulations, as if things go wrong in this sector the state is expected to bail out and the effects are systemic.
" In financial sector, competition sometimes leads to excessive risk taking and competition can be a source of instability rather than stability, which is not the case for non-financial sector of the economy. And the manifestation or climaxing of that was the 2008 global financial crisis," Nageswaran said.
V Anantha Nageswaran on Thursday nudged the private corporate sector to hire more and find the “right balance between capital-intensive and labour-intensive growth”, underling that while profits of listed companies, as a percentage of GDP, hit a 15-year high in 2023-24, their wage cost increase dwindled.
Without a judicious balance between the share of corporations’ income making up their profits and that going to workers as wages, there won’t be adequate demand in the economy for companies’ own products to be bought, the CEA said. Sustained income growth bolsters both consumption and savings, which eventually spur economic expansion.
[The Economic Times]
