Everything is Everything Ep 71: The journey of Indian finance
Nov 4, 2024
Ajay Shah, an esteemed economist and policy expert on Indian finance, delves into the transformative journey of India’s financial system. He highlights the historical failures of banking pre-regulation and the impact of nationalization. The evolution of equity markets post-1990s reforms is showcased as a success story. Additionally, Ajay argues for cautious growth in banking to prevent crises and critiques the downsides of capital controls and financial surveillance. His insights on bankruptcy and household finance reveal pressing contemporary challenges.
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Banking's Fragile Origins
- Early Indian banking was disaster-prone with repeated bank failures that shaped heavy state intervention.
- Global shocks like the Great Depression amplified domestic bank fragility and prompted regulatory consolidation.
Banks As Central Planning Tools
- Central planning turned Indian banks into extensions of the state, stifling innovation and diversity of business models.
- Banks became bureaucracies with identical products, limited private or foreign entry, and weak regulatory thinking.
Force Realistic Bank Accounting
- Require banks to mark assets to market and take losses promptly to reveal true balance sheets.
- Raise prudent equity capital ratios to buffer Indian banks against high macro uncertainty and weak regulation.
