A person showing Rs 100 notes. (Burhaan Kinu/Hindustan Times via GettyImages)
  • There are numerous benefits to be accrued by shifting from real or physical assets to financial ones.

    The government has its work cut out if Indian households are to make this key change.

When countries move up the development ladder, their citizens typically start investing more in financial assets and less in physical ones. It is considered healthy for a nation if its households move away from non-financial assets such as real estate and gold.

In households across the Western and developed countries, it is observed that the share of financial assets in total wealth is overwhelmingly high. There are some exceptions, of course. In a highly developed country like Japan, for instance, the share of real assets in total wealth for average households is close to 50 per cent.

On the other hand, there is Brazil, which is a developing country but whose average household has an unusually high share of financial assets (close to 40 per cent) as a portion of total wealth. It proves that sometimes and in some places, culture has an important role to play in determining how people make their financial decisions.


Learning how households in a country manage their finances can provide important insights for economists and policymakers in framing economic policies. Thus, we look at the financial management of Indian households.

An average household in India has 95 per cent of its total wealth in the form of physical assets (77 per cent in real estate, 11 per cent in gold and 7 per cent in durable goods), and only 5 per cent in financial assets. Mortgage penetration is low for younger households and rises with age, which often leads to situations where people pay off debt even after retirement. This is fraught with risks given the alarmingly high levels of unsecured debt they take from non-institutional sources. Investment in pension instruments is non-existent. Insurance penetration, both life and non-life, is low despite high exposure to health risks given the overall sanitation condition in the country and various other natural risks.

The Households Finance Committee led by Imperial College (London) professor Tarun Ramadorai has documented these findings in a report published last month.

Source: Households Finance Committee Source: Households Finance Committee

The committee found a strong correlation between low insurance penetration and high debt from non-institutional sources. A majority of the households are willing to take the risk of paying high costs in the case of an unfortunate event rather than pay a fraction of this cost as insurance premium in advance. And if and when they meet with an accident or their crops get destroyed due to unfavourable weather conditions, they approach friends, family members and, worse, moneylenders for emergency loans.

The message for policymakers couldn't be clearer: if you wish to decrease informal lending, work towards insuring households against life and non-life risks.

The report projects that if we continue to chart this path, the demand for physical assets like gold and real estate would keep increasing. This doesn't portend well for the country in general and citizens in particular. More demand for real estate will lead to continually rising prices, making it more unaffordable for everyone except the richest 1 per cent in the country. Importing gold to meet future demand will only eat into our forex reserves. Both of these developments would not augur well for the country.


Additionally, we should also look at it in the context of our high household savings, which is slightly less than 20 per cent of the gross domestic product (GDP). This is not bad per se, but in part reflective of the people's attitudes where they keep savings for emergency – a financial cushion. Plus, most of this also goes into investing in real estate or gold as households age, which is again counterproductive. It is important that households are nudged towards investing in financial assets such as mutual funds, which will also help in stabilising our markets and make them less dependent on foreign portfolio investments.

But despite the stunning performance of the mutual funds and stock market, decreasing savings bank rate and poor returns in real estate, the pace of movement towards financial assets among households is not increasing fast enough. One can understand the reluctance on behalf of the older generation, but even young professionals who are entering the job market and have access to technology are reluctant to move in this direction. A major reason for this is absence of financial education. We must include personal finance management in school and college curricula; otherwise millions of "urban poor" will inherit the country.

Going back to insurance, the Household Finance Committee report finds that 33 per cent of the households say they have either not heard of this instrument, don't think they need it or don't understand it. Essentially, this 33 per cent should be the low-hanging fruit for the government. Through an intensive marketing push, including finance management as part of the curriculum, ignorance can be tackled in five to 10 years.

Source: Households Finance Committee Source: Households Finance Committee

Half of the households report that they can't afford it. This is a challenge. But if we observe this in the context of the biggest risks that households face, the puzzle will be easier to solve.

Households report that crops destroyed by pests, bad weather or livestock, a major medical emergency, natural disaster destroying property and/or home have made the biggest dent in their income in the last two years. The first one is understandable because we went through two back-to-back monsoon deficit years, but even without it, this is not surprising since most of the workforce is employed in agriculture and they are more likely to report losses.

Moreover, we have had to face floods in Chennai and Kashmir, cyclones in Odisha and Andhra Pradesh. But we know that damages from all such natural disasters can be covered by insurance.

Source: Households Finance Committee Source: Households Finance Committee

It's puzzling to see many households report that they don't need insurance and then also report huge losses due to not availing the instrument in the first place.

Nonetheless, the government needs to do more on this front. First, it has launched a crop insurance scheme, but the companies are not clearing claims on time – taking months in some cases, which defeats the purpose. Farm claims must be quick to be effective.

Second, the Narendra Modi government has launched life insurance schemes like Pradhan Mantri Suraksha Bima Yojana and Pradhan Mantri Jeevan Jyoti Bima Yojana, a pension scheme like Atal Pension Yojana at a very low monthly premium but no health insurance scheme of such kind. Atal Pension Yojana or National Pension Scheme can be made mandatory for small sector employees where workers and employers can share costs. These would be much better than entertaining ideas like the national minimum wage.

Rashtriya Swasthya Bima Yojana covers only families categorised as living below poverty line (BPL). The government should consider a health insurance scheme for those who are above BPL but still can't afford high medical costs. It could set an income criteria (say, Rs 1 lakh) and a low premium. This could come with top-ups, variants and so on. Different households have different needs and the 'one size fits all’ type of health insurance will not work. As the report also notes, “indian households require customised financial products that account for their unique economic conditions, longstanding traditions, idiosyncratic life goals, and the complexity of their financial circumstances.”


But the government shouldn’t do all the heavy lifting. The private insurance sector has been seeing an upswing. The government can probably offer premium subvention schemes for an extension of both life and non-life insurance. Additionally, making life and medical insurance compulsory for all salaried professionals with employers paying half of the premium can be explored. This is already being done in the case of provident funds.

The report estimates that if households in the middle third of gold-holding distribution were to reinvest even one-fourth of their gold holdings, they can earn an amount equivalent to 0.8 per cent of their annual income. The same benefit will be 3.4 per cent if the households in the top third of gold-holding distribution did it. Similarly, "shifting from non-institutional debt to institutional debt can lead to gains equivalent to between 1.9 per cent and 4.2 per cent of annual income."

The bottom line is, there are numerous benefits to be accrued by shifting from real or physical assets to financial ones. The government has its work cut out.

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