In the dynamic landscape of India's economic growth, the significance of financial literacy cannot be overstated. As India’s middle class (and its income levels) rises, empowering individuals with the knowledge to make informed financial decisions becomes paramount. Despite notable strides in various sectors, there exists a considerable gap in financial literacy, impacting individuals across diverse demographics.
Here's a look at the current state of financial literacy in India, the challenges faced, initiatives in play, and the transformative potential of fostering a financially literate population and India's economic well-being.
Why Financial Literacy Matters
Financial literacy is a crucial life skill that helps individuals to effectively manage their financial matters and make informed decisions about money, investments, and financial goals.
Morningstar’s mission is to empower investor success, and rooted in this mission is the idea that when people have access to quality financial information, they can make better choices and see better outcomes down the road.
“It’s well-documented that people make simple financial mistakes that can have drastic consequences. For example, research shows that many people don’t contribute enough to their retirement plans, fail to choose fee-minimizing portfolios, or avoid investing in the market. What's behind these missteps? Studies suggest that many of them may be caused by a lack of financial literacy,” points out Morningstar’s behavioural researcher Samantha Lamas.
Although efforts are afoot to advance financial literacy in India, there remains a substantial distance to cover.
Financial Literacy Should Start From a Young Age – at Schools
Despite gradual improvements, studies show that the majority of Indians still lack basic financial literacy. Many are unaware of financial concepts such as budgeting, saving, and investing. This lack of knowledge can often result in poor financial decisions, including high levels of debt, inadequate retirement savings, and insufficient insurance coverage.
A recent National Finance Olympiad report found that only 16% of students of India were financially aware. This number is about 27% for adults in India, considerably lower than more advanced economies such as the United Kingdom, Canada, U.S., and Germany.
“The main reason for this is the unavailability of structured education around financial literacy for students,” points out Shiv Bidani, co-founder of National Finance Olympiad, an initiative to promote financial literacy in India.
The persistently low financial literacy levels among the majority of Indians stem from deeply ingrained cultural norms, “where money matters are thought of as a taboo and not discussed very openly,” he says.
In many households, key financial decisions are made by one person without consultation with other family members.“This will take incredible effort to change and will come with its own challenges,” says Bidani.
He advocates addressing financial literacy at its grassroots, right from a young age. An effective way to do that is to reach young students and equip them with financial education throughs school curriculum and “train them to make the right decisions about their money matters,” he notes.
Subjects like the introduction to money, investments, loans and credit, frauds and scams, and money management could significantly enhance students' understanding of financial concepts.
What Can the Government Do to Help Spread Financial Literacy?
The government and financial institutions are implementing initiatives to educate the public on financial management. The RBI, for instance has taken steps to promote financial awareness and education, including online courses, financial literacy camps, and seminars, while India’s securities regulator SEBI organizes investor education programs in collaboration with investor associations across the nation.
Targeting the correct audience is crucial, but often these initiatives lack sufficient publicity. Bidani argues that many don’t know these resources are available.“There is a lot of publicly available material that can be downloaded from these institution websites, but unfortunately many Indians are unaware about such material,” says he.
“Financial education must take a front seat and be mandated in the form of government policies,” Bidani argues, adding that “schools and colleges are the best place to begin.”
As well, financial institutions should provide practical financial knowledge to their customers, particularly regarding fraud prevention.
The Increased Role of Financial Planning in Financial Literacy
There is a growing awareness of the importance of financial planning as more individuals seek professional advice. The Financial Independence Retire Early (FIRE) movement is gaining popularity, as an example. “People are actively talking about the Golden Number: the wealth one needs to accumulate in order to live a financially independent life,” Bidani notes.
Investors are also increasingly diversifying away from real estate to low-capex assets, and new financial instruments such as real estate investment trusts (REITs) and fixed income products (corporate debt), Bidani informs. Participation in equity is up as evidenced by the steady growth in Mutual Funds SIPs, which is expected to consistently tick up. Notably, the awareness of financial planning has shown a more robust growth in specific demographic groups and particular regions.
“Our findings indicate a direct correlation between financial planning and literacy and the per-capita income of a region,” says Bidani. Wealthier Indian families tend to be more financially literate, he notes, and adds “the government has an important part to play in imparting this information to a wider demographic.”
There also appears to be a gap in the adoption of financial literacy between schools in India's major cities and smaller towns. “Schools in tier-1 cities are taking an active role by leading the change,” says Bidani. He says, though, schools in tier-2 and 3-cities are lagging in embracing financial education, but the gap is narrowing “slowly but consistently.”
Impact of Financial Illiteracy
Financially uneducated individuals are prone to making poor money choices leading to debt traps, risky investment decisions and falling victims to scams. Those lacking financial education are also vulnerable to predatory practices. Some lenders impose unrealistic interest rate of 3% per month which translates to about 36% per annum.
The average Indian consumer, Bidani warns, must understand that these interest rates are not consumer-friendly, in order to avoid falling into such traps.
Lack of financial education perpetuates income inequality and hampers inclusive economic growth. “Financial illiteracy is one of the main reasons of wealth inequality,” says Bidani. “Financial literacy significantly helps people from unprivileged classes to grow their wealthy over time, thus improving income.”
How to Improve Financial Education
Lamas points out that at all levels, research suggests that there are some benefits to taking a general financial education class. This form of financial literacy program brings about awareness to some financial tools and topics that could be useful later. However, this should be seen as the start of the process--a first step to making more informed financial decisions in the long term.
Lamas shares a few promising next steps from the research:
- Incorporate rules of thumb. Easy-to-use financial rules of thumb have always been popular, but as it turns out, they can also be helpful. Existing research comparing a rule-of-thumb-based financial education program to a traditional one found that participants in the rule-of-thumb course displayed improved financial behaviors afterward. When it comes to incorporating a rule of thumb in your financial process, just make sure you choose one that fits well with your lifestyle and financial goals.
- When in doubt, automate it. We are surrounded by technology nowadays, why not use it to our advantage? For example, if your goal is to save more every month, set up an automatic transfer from your checking account to your savings account right when you get a paycheck. Using technology to automate positive financial behaviors keeps the action "out of sight, out of mind," while still ensuring that you stick to your plan.
- Make it a habit. If technology isn't at your disposal, the next best thing is to make the financial behavior a habit. A habit is a mental shortcut our minds take, many of which are unintentional because they've become something we do automatically. That's why building a habit out of a positive financial behavior can be a powerful tool. Pretty soon, you'll be acing financial decisions instinctively.
- Incorporate just-in-time education. If you learn how to sign up for a systematic investment plan, or SIP, in high school, it may not stick with you years later when you start your first job. Instead, research finds that there is promise behind just-in-time education. This technique teaches materials when a person needs to make a relevant decision. For example, providing new employees with a financial education program their first week on the job, allowing them to use what they learn right away.
