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Need for Financial Literacy in India

In 2003, the United States Senate designated April as Financial Literacy for Youth Month. In March 2004 the Senate passed Resolution 316 that officially recognized April as National Financial Literacy Month.

In Canada, November is observed as the Financial Literacy month.

Guess who else needs a Financial Literacy month? India!

People in India are oblivious about finance as a subject and are not enough educated to take financially sound decisions. This month is just about to end, with US celebrating Financial Literacy, it’s time we reminiscence the questions which glare us at our face.

Firstly, some straight-up facts regarding India’s rather deficient financial influence:

  1. In a survey on global financial literacy by Visa, Indians emerged as one of the least financially literate among 28 countries. Indians ranked low in this survey for several reasons, including the lack of household budgets, money management discussions with family, financial education or an understanding of money management basics. Indians were ranked as 23rd out of 28 countries with only 35% of Indian respondents emerging as financially literate.

2. Indian families discuss money matters including budgeting, saving and responsible spending habits with their children just 10 days per year, this survey tells us. The reason? 43% women and 20% men said they did not understand personal money management well enough to discuss the subject with their children.

3. A Survey of Financial Literacy among Students, Young Employees and the Retired in India by IIM Ahmedabad supported by Citi Foundation concluded that only 22% of students have high financial knowledge while 50% scored only a very low on the financial knowledge barometer. Further only 45% got a correct response to a question on compound interest and only 43% understand how inflation affects prices.

4. The IIM survey also indicated that awareness of financial products is generally low among employed adults with only about 7% aware of all the commonly available products. Awareness about fixed deposits, one of the most popular financial products, is also not universal. More than half of young employees are not aware of employee specific tools like PPF and pension-fund. Most rely on friends and relatives, and of course, the Internet when it comes to choosing financial products and services!

5. Another survey on the elderly by HelpAge India indicated that 79% of India’s oldest old are financially dependent on their children. This financial dependency was highest in Delhi NCR at 90%, with Kolkata next at 84 %, followed by Ahmedabad at 83%. Hyderabad did the best at 40%.

(Fact source: http://indusleap.com/five-reasons-india-needs-a-financial-literacy-month/)

The Problem

The number one problem in today’s generation and economy is the lack of financial literacy. — Alan Greenspan

These miniscule things build up over time and tend to have long-term implications for both the households and the broader economy. In fact, the results are right in front of our eyes.

The private capex cycle has only gone from bad to worse: from a CAGR of 49% in FY05–08 to 13% in FY09–12 and plummeting to a low of 4% over FY13–17. Gross fixed capital formation as a percentage of GDP has fallen from 32% to 29% in the first half of FY18. Public investment, too, has fallen from 32% of GDP to less than 28% “The country’s chief economic advisor, Arvind Subramanian and also the vice-chairman of Niti Aayog, Dr. Rajiv Kumar on numerous occasions have mentioned that a public investment revival will give the much needed boost, but their advice is falling on deaf ears. Instead of vision and lectures on reforms, the powers that be need to put in place a policy outline to spur demand,” adds Alagh. (source)

Financial illiteracy puts a burden on the nation in the form of higher cost of financial security and lesser prosperity. Most people resort to investing more in physical assets and short term instruments which clearly conflicts with the greater need for long-term investments, both for households to meet their life stage goals and for meeting the country’s capital requirements for infrastructure.

What you need to know

For starters, if you are reading this and wondering what are some basic things you need to know, here are 5 things that you MUST:

  • Inflation: This is what erodes your money’s value over time. Your parents used to watch movies at 30 times lesser price than what you watch now. Why? Because of inflation. Your goal of investing should be to AT LEAST beat the inflation rate in your country, otherwise you are losing.
  • Compound Interest: Money when invested, or debt when lent out multiplies over time because of the 8th wonder that is; compound interest.
  • Risk: EVERY investment you make comes with a tag, called risk. Studying and managing risk is an art, and usually takes years to perfect it. Without proper risk management, you will see even your safest of bets tumbling downwards.
  • Time value of money: Remember always, that the value of money diminishes with time. Money today is always more valuable than money tomorrow. And inflation is just one of the reasons why it happens. This is the concept which gave birth to interest payments.
  • Diversification: There is a saying which goes like, “Never keep all your eggs in one basket”. If you invest in a single financial instrument (security, stock, bond, derivative), you risk losing all your investment. However, with judicious selection of different investment vehicles and allocating your funds in an optimal manner, you can maximize your returns without increasing your risk or exposure.

Conclusion

The lack of finance as a subject in schools is bewildering. While we are made to learn the chemical composition of limestone, we don’t even know how to write a cheque or how to understand simple stock tickers!

So pick up today’s ET and read whatever stuff seem relatable to you. Don’t worry if you don’t ‘get’ the jargon-filled words used by writers, because financial experts love to use jargons in an attempt to seem more prudent than the average Joe. But in reality, 90% of all financial concepts are extremely easy to understand and clearly intuitive.

Keep learning, keep growing!