Will evolved markets, democracy help us achieve national goals in fragmented world, asks CEA

Mumbai, Nov 7 (PTI) Chief Economic Advisor V Anantha Nageswaran on Friday questioned if India's strengths of an evolved market and democracy help achieve the national goals in a fragmented world.

Speaking at an event organised by SBI, Nageswaran said a fragmented world that requires strategic resilience and globalisation -- the key theme that has delivered well for India for over three decades -- will not come to our aid.

"We have to ask ourselves whether the compulsions of markets and democracy will really enable us to transcend those barriers and be able to achieve goals of national interest?" Nageswaran added.

This is a question not just relevant for the public sector, but also the private sector, including financial and non-financial institutions, he added.

Elaborating on his concerns, the academic-turned-policymaker said the market economy leads to short-term goals getting foregrounded, while the current global economic circumstances lay an importance on long-term goals.

In the comments that come weeks after US President Donald Trump went public with his calls to end the system of companies reporting quarterly performances, Nageswaran said the tendency to cater to the market's demands and deliver better performance every quarter may be "counter-productive" as it may veer away attention from the long-term goals.

He also made a comparative case between India and other countries who were behind the curve on market development, and wondered if the latter group is better placed in the current circumstances.

"... those societies which we thought had erred in not putting their capital markets development ahead of national imperatives now seem to be having their upper hand vis-a-vis us," he said, without mentioning any names.

Flagging challenges faced in situations where growth in financial sector's growth is faster than national economic growth, Nageswaran pitched for prescriptive regulations in the financial sector rather than the current focus on the principle-based regulations.

"Between principle based and prescriptive rules and regulations, the relative emphasis should be on principle based for non-financial sector and slightly more leaning towards prescriptive when it comes to finance because in non-financial sectors, competition plays the role of the regulator. In financial sector, competition can actually accentuate the risks and the imbalances, making the system more unstable," he said.

If a crisis occurs, the spillovers in the financial sector will be far-reaching, making it inevitable for the state to bailout a set of entities and hence, there is a need for measures to avert any crisis.

He said the faster growth in financial sector makes it difficult for economies to attract talent in attracting talent in the non-financial sector.

The diversity and spread of India can help the country at the current juncture, he said, pointing to the strengths.

States with middle-income per capita incomes can focus on the high-tech areas and innovation, while those lower down the economic ladder can concentrate on labour-intensive manufacturing before they move up the value chain, he said.

"We have the geographical spread to be able to span labour-intensive manufacturing to high-tech manufacturing, and that is where I think the real constraint is not policy or not resources but also the mindset," Nageswaran said. PTI AA TRB