Importance of financial education and its impact on the Indian economy
Manoj Honhaga
November 15, 2023
“Money Schools” is the need of the Hour.
India is quickly emerging as one of the fastest-growing economies in the world.
Its large population is seen as an asset by Multinational Corporations. There has been a steady increase in foreign investments, and many Indian companies have expanded their operations to other countries.
In a rapidly changing global environment, financial literacy is one of the most undermined skills that could determine the countries’ future.
What is Financial Literacy
Financial literacy is, in other words, the capacity to manage your finances in the best manner. That is, through optimum use of the available financial products and resources to get yourself maximum benefit. It is about knowing how to generate, spend, invest and save money.
Financial education is crucial for individuals to make informed decisions about their money and achieve their financial goals.
Status of Financial Literacy in India
In India, financial literacy rates are relatively low, and this can have a negative impact on the Economy. According to the 2018 census, 74.37% of the total population is literate, but as per a recent report by SEBI, only 27% of the country’s population is financially literate.
Three-fourths of the Population in India does not know or understand the pressing need to manage finances is scary for a country that depends on the Economy for its development.
The COVID-19 pandemic has further amplified the need for financial education to accelerate the Economy’s growth. The pandemic left millions jobless in a matter of months, with ever-increasing bills to pay.
The Economy is slowly getting back on track, and investments are increasing in the retail sector, but the looming threat of a lack of financial literacy could have long-lasting consequences.
The Reasons for the lack
Here are some important facts that cause a lack of financial education in India:
Lack of formal education
There’s no doubt that Indian schools need to make financial education compulsory for all. Over the years, the government has initiated policies to improve unsatisfactory literacy rates. However, all the programs undertaken have a fundamental problem — a lack of implementation.
PFDRA Initiatives on Financial Education, Insurance Regulatory Development Authority initiatives, SEBI, and RBI’s initiative have all been on paper. An average middle-class Indian or a student isn’t even aware of these initiatives. Thus, financial education needs to be implemented on the grassroots level — Students and Graduates. There’s a need for formal training of teachers in financial education.
Ex-A study by the Reserve Bank of India (RBI) found that only 33% of adults in India had a basic understanding of financial concepts and products.
Cultural barriers
In a country where asceticism, anti-materialism, and fatalism are integral to the culture, any effort toward changing the material state of the poor is considered futile. Many agree — Money is the root of all evil.
To many, wealth, not poverty, is surprising.
And in Indian families, there is perhaps no bigger taboo than discussing the intimate details of one’s monetary status. This air of secrecy and lack of transparency means that children’s relationship with money becomes fractured even before it can form. That is, when one never learns to spend money, they never learn to compound it either.
There is also a cultural preference towards spending and consumption rather than saving and investing in India.
In some traditional households, financial decisions are made by men, and women are not involved. Growing up with this cultural spectacle makes it almost “unnatural” for women to comment on money matters. Never watching their mothers make the financial decisions leaves young women grossly ill-prepared for when they have to make these decisions in their life.
Ex-Financial literacy in India is around 21% for women.
Limited awareness of financial products and services
Limited awareness of financial products and services in India is a common problem, particularly in rural areas. Many people in these areas do not have access to basic financial services such as bank accounts and loans, and they may not be aware of other products such as insurance or investment options.
This can lead to a lack of financial literacy and difficulty in managing money and planning for the future.
Ex-A study conducted by the National Sample Survey Office (NSSO) revealed that only 24% of households in India had access to banking services.
Another ex-A survey by the Confederation of Indian Industry (CII) found that only 30% of households in India had access to insurance products.
Language barriers
Financial concepts and products can be complex, and language barriers can make it difficult for individuals to understand them, especially for people who speak regional languages or dialects.
Additionally, financial materials and resources may be primarily in English, which further exacerbates the issue. English can be a barrier to financial literacy in India because a significant portion of the population may not speak or understand it well.
This can make it difficult for them to access financial education and information and to effectively navigate economic systems and products.
Ex-In a country where 10.62% understand English.
Lack of trust in financial institutions
Some people may not trust banks and other financial institutions, which can make it difficult for them to open accounts, invest or seek credit.
There have been several high-profile scandals involving financial institutions in India, which have eroded public trust. Corruption in the financial sector can also contribute to a lack of confidence in financial institutions, as people may believe that they will not be treated fairly or that their money will not be safe.
Making them more susceptible to fraud and misselling.
Ex-A Financial Inclusion Insights (FII) survey reported that over 50% of the respondents did not trust their banks to manage their savings and wealth.
Its impact on the Indian Economy
Low financial literacy can have a negative impact on the Indian Economy in several ways. Some of the main ways include:
Increased vulnerability to fraud
An inadequate understanding of financial products and services can also lead to increased vulnerability to financial frauds and scams, resulting in significant economic losses for individuals.
Additionally, the lack of strong legal protections and enforcement mechanisms and the rapid pace of economic growth and modernization in India has led to increased competition and pressure on businesses to succeed, which can lead to unethical and fraudulent behavior. Furthermore, the use of digital technologies has also increased the vulnerability to cyber fraud in India.
Ex-India reported 52,974 incidents of cyber crimes in 2021, an increase of nearly six percent from the year before.
Another ex-According US FBI report in 2022, India ranks fourth on the list of victims of cybercrimes in the world.
Low Entrepreneurship Endeavors
Low financial knowledge dilutes entrepreneurship confidence. Without know-how, India’s regulatory environment can be challenging for entrepreneurs, with a complex web of rules and regulations that can be difficult to navigate.
Limited understanding of financial concepts such as cash flow, budgeting, access credit, seeking out professional advice and support, tax laws and regulations, and financial forecasting can make it difficult for entrepreneurs to develop and execute effective business plans, which is critical for running a business.
It’s worth noting that entrepreneurship is on the rise in India, but it still has a long way to go to reach its full potential.
Ex-As per World Bank data, India ranks third in the number of new firms created.
Low savings and investment
People with low financial literacy may not understand the importance of savings and investment and may not be able to make informed decisions about where to invest their money, leading to low savings and investment rates.
Low financial literacy can also lead to a lack of participation in capital markets, resulting in reduced access to capital for businesses, which can negatively impact economic growth and development. Causing a lack of financial inclusion, which can perpetuate poverty and income inequality.
It’s worth noting that the savings and investment rate in India has been gradually increasing over the years, and government policies have been working on addressing these challenges. However, much more needs to be done to improve the savings and investment rate in India.
Low quality of living
A lack of understanding of financial products may lead to over-indebtedness and financial insecurity. A such individual becomes less likely to save and invest their money, which can make it difficult for them to build wealth and achieve financial security.
They may Poorly plan for retirement and may not have enough money to live on in their later years. They may struggle in making financial decisions, such as buying a house or car or investing in various financial instruments, which can have a long-term impact on their financial well-being.
The usage rate of financial products by the masses in India varies depending on the specific product. However, overall, the usage rate has been increasing in recent years due to government initiatives to promote financial inclusion and the growth of digital financial services.
Ex- the number of bank accounts and credit cards held by Indians has been increasing, and mobile banking usage has also been growing rapidly.
However, there are still significant gaps in financial inclusion in India, particularly in rural areas.
Closing
Nonetheless, there has been a remarkable improvement in the percentage in the last eight years, from 15% in 2013 to 27% in 2021. In conclusion, financial education is important for individuals to make informed decisions about their money and can also have a positive impact on the Economy as a whole.
Therefore, governments, financial institutions, and educational institutions should focus on providing financial education to the public in order to promote financial literacy and economic growth.
In a population of 1.3 billion, emphasis on financial education will make a long-lasting impact. Government spending on financial education would give them higher returns. Financial literacy is the doorway to effective human capital formation.
Financial skills will help to raise the standard of living and contribute to overall growth. Our labor force, combined with good financial education, would help us eradicate poverty to some extent. In short, a financially smart India would be a major force in the world.
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