Financialisation

Financialisation Latest News

The Economic Survey 2024-25 has warned that excessive financialisation can harm the economy, with potentially severe consequences for a low-middle-income country like India.

About Financialisation

• Financialization refers to the increasing influence of financial motives, markets, instruments, actors, and institutions in both domestic and international economies. 
• It involves the growing dominance of finance tools in firm management, the impact of financial markets on decision-making, and the significance of the global financial system in capital distribution worldwide.
• It represents the shift from traditional industrial or productive activities (like manufacturing) to financial activities that involve the trading, management, and speculation of financial assets.
• Financialization transforms the functioning of the economic system at both the macro and micro levels. 

Impacts of Financialisation

• Elevate the significance of the financial sector relative to the real sector; 
• Transfer income from the real sector to the financial sector;
• Increase income inequality and contribute to wage stagnation. 
• Financialization operates through three different conduits: changes in the structure and operation of financial markets, changes in the behavior of non-financial corporations, and changes in economic policy. 

Financialisation FAQs

Q1. What are the risks of financialization?

Ans. Financialization distorts economic investment and reduces the mutual dependence of capital and labor, eroding the social contract in which capitalism delivers profits to the owners of capital and a growing standard of living to citizens.

Q2. How to measure financialization?

Ans. From the macroeconomics perspective, the existing literature measures financialization by the proportion of industrial employment, industrial output value, and industrial profits to assess whether a country's economy is over-financialized.

Q3. What is hyper-financialization?

Ans. Hyper-financialization refers to an extreme stage of financialization where financial markets, institutions, and instruments dominate an economy to the point that traditional productive activities become secondary. 

Source: IE