In personal finance, a lot is happening around financial literacy. Every financial product tries to ‘educate’ you on the right thing to do when saving, investing, or buying insurance. Financial literacy has been an area of research for some time now. It is closely associated with your financial well-being. There are three essential aspects of financial literacy. Your knowledge, attitude and behaviour matter a lot in measuring financial literacy.
A new article published in the latest Reserve Bank of India Bulletin flags a concern. A field survey on financial literacy was conducted to check people’s attitudes towards financial literacy. It says that you have shown an improvement in financial knowledge. However, when asked to agree or disagree with statements related to financial attitude, most of the people surveyed scored poorly.
The questions in attitude survey ask people three questions. The first one is about if they live for the day. That means living in the moment and letting tomorrow take care of itself. The second one is if they find it satisfying to spend money than to save for the long-term. The third one is if they agree that money is there to spend.
On a scale of 1 to 5, the score is low if you strongly agree or agree. India’s overall financial attitude score was 1.97 out of a maximum of 5. The survey was conducted based on the standard questionnaire set by the Organisation for Economic Co-operation and Development (OECD) that covers G20 countries in the survey. It is way below the OECD average of 3. It is higher for rich countries and lower for developing nations like India and Indonesia. That means as everyone gets financially aware and knowledgeable, they tend to save and invest.
If you dive a bit deeper, the score is highest among retirees. It is the worst among the poor daily wage workers. Age and experience steadily seem to be making people aware of money. Within the age groups, those between 20-29 show a better attitude towards saving for tomorrow than those aged 30-39. That could be because the young working class has limited current responsibilities. They are probably exposed to financial knowledge better than the higher age group. Those in their 30s tend to spend more as they build families and homes. Women are better at this than men. They tend to care more about the future than men.
Despite that, an overall score in the financial attitude category pulls Indian households to prosperity. That perhaps explains the poor penetration of mutual funds and demat accounts that encourage long-term investing. Barely 2% of the population has demat accounts, and 2.5% invest through mutual funds. That is also why most’ investor education’ and ‘awareness campaigns fail to capture the public’s imagination. These campaigns are merely making people aware of products and services. They are not engaging enough for people to change their financial attitude. The overall Indian tally had barely moved since 2017 when OECD surveyed G20 countries. That is surprising since a lot has happened in India regarding people’s participation in financial markets.
Today, over 800 million Indians own smartphones. Mobile internet is everywhere. The so-called India stack led by Aadhaar, UPI and smartphones creates a backbone for a personal finance revolution in India. There is a need for a nudge from the governments and regulators to encourage them to save for the long term. Indeed, India is not a tax haven.
Nobody should assume that India is for those wanting to avoid taxes. However, there is a need to reconsider the applicability of long-term capital gains on savings. Things like pensions subscribed for through the national pension system and money invested in ETFs should be made long-term capital gains tax-free, at least for a decade. At the same time, there must be some rethink about the communication. Stock market investments are subject to market risk. That should be taught early in high school instead of propagating it while promoting long-term saving products linked to equity markets.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)