Discussing the relevance and requirement of financial literacy in India, Ambarish Datta, managing director, BSE Institute Ltd. Mumbai, lists his strategies of change
KNOWLEDGE ON WISE INVESTMENT AND CHARGE OF FINANCIAL WELL-BEING CAN ONLY BE POSSIBLE WITH FINANCIAL LITERACY
Over the past few years, the financial landscape in India has changed significantly. Not only must we take greater charge of our financial well being once we retire, but we need to forecast future financial needs, navigate increasingly complex financial markets and manage risk, both during and after our working years. At the same time, financial products, including loans and products used for saving and investing, have become numerous and more complicated, requiring individuals to make choices on an array of options. In addition, the price tag for many components of their dream— including purchasing a home or funding a child’s college education— has risen since the 1980s and 1990s. Especially with respect to college tuition costs, that trend promises to continue.
Against this backdrop, the consequences of not having the necessary skills to make sound financial decisions become ever more severe. Not only has managing day- to- day finances become more difficult for many Indians, but there are also greater risks in getting it wrong.
India is among the world’s most efficient financial markets in terms of technology, regulation and systems. It also has one of the highest savings rate in the world - our gross household savings rate, which averaged 19 per cent of gross domestic product ( GDP) between 199697 and 1999- 2000, increased to about 23 per cent in 2003- 04 and has been growing ever since. While savings are more in India, where the savings are invested is a cause for concern.
A majority of our households do not use modern financial markets. As per an RBI report, only 1.4 per cent of household savings was invested in equity, mutual funds and debentures in 200304. Though this went up to about four per cent in 2005- 06, it is still not much.
Unless the common person becomes a wiser investor and is protected from wrong doings, wealth creation for the investor and the economy will remain a distant dream. The problem of adult illiteracy in India is widespread and alarming, however, we are aware of it and measures are being taken to address it. The problem of mathematical illiteracy is much less well known. In fact, it is downright obscure— so obscure that there isn’t really a ready- made term to describe the group of people who can’t calculate bank deposit interests or balance their checkbook.
Renowned mathematician John Allen Paulos tried to change that in 1988 when he published the book
Innumeracy. He described innumeracy as, incompetence with numbers. Innumeracy leads to many incorrect financial decisions. What is the implication of innumeracy? It means people who are innumerate cannot determine whether a car has enough petrol to get to the next petrol pump, calculate the cost of raising a child for a year in a family with a specified income, calculate the total cost of office supplies using a page from an office supplies catalogue and an order form. They also cannot compare different home or personal loan options and identify which is the best.
SPREADING FINANCIAL LITERACY
With the rapid growth in our economy and greater number of people having a disposable income that can be invested in various avenues like the capital markets, financial literacy is the need of the hour. About 50 per cent of households in the US and Sweden, and over one third in the UK invest directly or indirectly ( through mutual funds and other managed investment accounts) in the stock market. In the Netherlands, Italy, France and Germany the proportion is between 15 and 25 per cent, but in each of these countries it has increased quite significantly, sometimes doubling in the course of the last decade. You can
imagine the huge impact retail participation will have on the Indian economy, if we can move from the current four to five per cent to 15 per cent.
We need to have a well chalked out plan to spread financial literacy and implement it across the nation addressing all strata of society. We need to coordinate with all agencies like the government, financial institutions and educational institutes to make it happen.
Already there are efforts at financial literacy being taken up by banks, financial institutes, and government agencies. If all these efforts can be coordinated and educational institutes can be looped in to launch a national financial literacy mission, we can really make a difference.
Like some other counties in the world such as Australia, we need to have a national financial literacy policy. This national strategy to improve financial literacy should be founded upon some core principles. One could be inclusiveness— reaching all Indians, particularly those most in need and future generations of consumers and investors. Another strategy is engagement— helping all Indians appreciate the importance of financial literacy and small things done regularly make a real difference— delivering learning that recognises the different ways people learn and allows all Indians to participate.
Apart from these, knowledge and empowerment also plays an important role— giving all Indians access to information, tools and ongoing support systems. This leads to improving outcomes, which simply put means, recognising that information alone is not always enough and additional mechanisms must be used to achieve better outcomes.
Partnerships in mapping and building on existing foundations to fill gaps can also ensure all sectors and agencies work cooperatively; and finally measurement and evaluation of work.
CATCHING THEM YOUNG
Introducing financial literacy in the school and college curriculum is a must for making India a financially literate nation. Effective integration of financial education into education is the cornerstone to bringing about long- term generational change in knowledge, attitudes and behaviours.
EFFECTIVE INTEGRATION OF FINANCIAL EDUCATION IS THE CORNERSTONE TO BRINGING ABOUT LONGTERM GENERATIONAL CHANGE IN KNOWLEDGE"