The real sector — core activities of the economy, comprising supply and demand of goods, services and labour — should drive the funding and financial markets, rather than the other way around, Duvvuri Subbarao, governor, the Reserve Bank of India said, referring to the global economy at large.
Delivering the inaugural address at the first CAFRAL-BIS, (Centre for Advanced Financial Research and Learning and Bank for International Settlements) international conference on ‘Financial Sector Regulation for Growth, Equity and Stability in the Post Crisis World,’ he pointed out that while historical experience may tempt one to believe that financial sector development aids growth and, therefore, more of it must be better, the actual experience was different.
Citing the example of the US, he said “Over the last 50 years, the share of value added from manufacturing in GDP shrank by more than half from around 25% to 12% while the share of financial sector more than doubled from 3.7% to 8.4%”.
The same trend is reflected in profits too. In the same period, the share of manufacturing sector profits in total profits declined by more than two-thirds from 49% to 15% while the share of profits of the financial sector more than doubled from 17% to 35%.
The large share of the financial sector in profits, when its share of activity was so much lower, tells a compelling story about the misalignment of the real and financial sectors, he said.
Jaime Caruana, GM, Bank for International Settlements, said sovereigns must earn back their reputation as risk free borrowers, since they act as the ultimate backstop facility. He also urged countries to build up fiscal buffers during good times.