A recent RBI-constituted study chaired by Dr Tarun Ramadorai, Professor of Financial Economics at Imperial College London, revealed that a staggering 95 per cent of Indian households’savings are in gold and real estate. Wealth inequality, which is pronounced than income inequality, is worrisome both from a political and social perspective Ramadorai tells Sunitha Natti of TNIE. Excerpts:
Is the savings trend unique to India?
There are international comparisons that show that it’s not unusual for developing countries, including China and Thailand, to have high levels of physicals assets in household portfolios. What is unusual in India is that 95 per cent allocation doesn’t alter as Indians become wealthier. There’s simply a shift in gold from the lowest point of the wealth distribution, to real estate at the highest point of the wealth distribution, with the 95 per cent share roughly fixed. Two, gold is an unusual Indian problem with a particularly high allocation, not seen in other comparable economies.
Do you think the pace of wealth generation has been slower and lower compared to individuals favouring financial products?
Yes, we document in the (RBI) report that movements away from gold into other financial assets can generate greater income growth, and that Indians would benefit financially from implementing changes in household behaviour.
How can more financialization of savings be achieved? How will it help the economy?
Participating in financial assets can sometimes be a challenge because of high levels of bureaucracy making it difficult for people to enter such assets. We suggest that technology be used to facilitate people’s access, though we also need to be aware of Data Privacy issues.
Clearly a large movement of household assets into physical assets will provide a strong tailwind for the Indian market, should this change be achieved.
Lack of trust in financial institutions, which partly explains our tendency to avoid financial products. Would you recommend this trend be reversed?
Trust issues correlate highly with the income level of the household, which helps to explain the tendency of households to eschew financial products and to invest in instruments such as gold instead. Cost and distribution considerations seem important to Indian households, and the report explores how best to rationalise distribution incentives. For example, we recommend rationalisation of commission on insurance products. We recommend that building trust is essential, and we believe this is part of the solution.
The rich don’t just have more wealth, but bulk of the wealth comes from different—more lucrative—asset sources. What should be done to replicate this to the bottom of the pyramid?
The rich do not actually have better allocation of wealth compared to the poor. If households at bottom of the pyramid allocated their assets better, this would help to reduce income and wealth inequality as these households earn greater rates of return on their assets.
How does wealth inequality hurt the economy or growth?
It is certainly worrisome from both a social and political perspective. Indeed as we have seen, political and social developments can in turn substantially affect trust in and support for economic growth if the benefits of economic growth are not widely distributed.