Role of Finance

What is the role of finance in an economy? Can 'finance' in itself be a goal of optimization in the economic planning? Can the growth of 'financial sector' in itself lead to national economic prosperity? These questions are pertinent to ask although it sounds naive and amateurish. 'Finance' is a means to achieve 'real' growth. You need finance to start your business, build your home or buy a motor vehicle. Finance is a mechanism to reallocate resources from those who are having excess to those who need it. It is the fuel to kick start the engine. What happens when Finance itself becomes the overriding goal of a society? You create 'Finance' then more 'Finance' on 'Finance' and then more.......till the edifice collapses. You start to believe that 'Finance' is real and real is a mirage. That is the crux of the current crisis. In the era of globalization, there can be specialization like some countries may focus merely on building the service sector enterprise and some may build factories and machines. But, as long as the level of opacity is less and there are mechanisms to inspect, scrutinize and certify the 'Finance' instruments, one feels safe and there is no imminent danger. However, when the complexity level increases and you fail to understand what you are buying, then a simple 'hoax' call may lead to a bank run or other financial chaos. It is more about 'trust' than anything else. This is a perfect time to re-look the entire development models of developing and advanced countries. Especially in India, we need more schools, more bridges, more factories and more health care facilities. We need Finance to develop all these. However, Finance should be a tool to achieve all these not a goal in itself. I think the policy makers when they are in doubt must refer to Gandhiji's talisman:

Whenever you are in doubt, or when the self becomes too much with you, apply the following test. Recall the face of the poorest and the weakest man [woman] whom you may have seen, and ask yourself, if the step you contemplate is going to be of any use to him [her]. Will he [she] gain anything by it? Will it restore him [her] to a control over his [her] own life and destiny? In other words, will it lead to swaraj [freedom] for the hungry and spiritually starving millions? Then you will find your doubts and your self melt away.

More on this next time.

In the name of Reform

Much water has flown under the bridge since my last post. There are signs of growth stabilization. Developing countries are recovering at a faster rate than the OECD countries. EU nations are again under a debt trap. Lot of stabilization measures have been initiated. We need to wait and watch the unfolding of this new debt ridden problems. There are lots of talks about REFORMS. It has become a buzz word. The latest being the cut of power of FSA (Financial Services Authority) of U.K. It has become a kind of subsidiary to the Bank of England. Seemingly impossible are now becoming possible. It reminds me of the view of the Austrian Economists - they view the economic calamities as Tuneup Cleaner - it cleans the unnecessary elements from your system. There is a lot of noise in India also to streamline the regulations (latest being the SEBI-IRDA spat and the Ordinance). Do we need to overhaul our system? I will continue to write on this subject.For the time being I would like you to go through a paper (I am not adding any adjective). The title of the paper is: Financial Sector Reform: Realities and Myths by R H Patil (Download the paper).