Time for a national financial literacy policy

Introducing  financial literacy in the school curriculum is a must for making India financially literate. Effective integration of financial
education in school is the cornerstone to bring about long-term generational change in knowledge, attitudes and behaviors.

Time for a national financial literacy policy

The depth of our financial ignorance is startling. Over the past few years, the financial landscape in India has changed significantly. Not only must we take greater charge of our financial well being once we retire, but we need to forecast future financial needs, navigate increasingly complex financial markets and manage risk, both during and after our working years. At the same time, financial products, including loans and products used for saving and investing, have become more numerous and more complicated, requiring individuals to make choices on an array of options. In addition, the price tag for many components of their dream-including purchasing a home or funding a child’s college education-has risen since the 1980s and 1990s. Especially with respect to college tuition costs, that trend promises to continue.

Against this backdrop, the consequences of not having the necessary skills to make sound financial decisions become ever more severe. This is particularly true in times of economic instability, when resources may be limited and negative financial events, such as the loss of a job or a sharp decline in income, more frequent. Not only has managing day-to-day finances become more difficult for many Indians, but there are also greater risks in getting it wrong.

Depth of the Problem

Many of us are aware of our financial ignorance. Even those who claim to be adept at dealing with day-to-day financial matters, often engage in financial behavior that exhibited a marked inability to do basic interest calculations and other math-oriented tasks. In addition, few compare the terms of financial products or shopped around before making financial decisions.

India is among the world’s most efficient financial markets in terms of technology, regulation and systems. It also has one of the highest savings rate in the world – our gross household savings rate, which averaged 19% of gross domestic product (GDP) between 1996-97 and 1999-2000, increased to about 23% in 2003-04 and has been growing ever since.

While savings are more in India, where the savings are invested is a cause for concern. Investments by households have been more into either bank fixed deposits, risk-free government-backed securities and low-yielding instruments, or in non-financial assets.

A majority of our households do not use modern financial markets. As per an RBI report, only 1.4% of household savings was invested in equity, mutual funds and debentures in 2003-04. Though this went up to about 4% in 2005-06, it is still very small. Unless the common person becomes a wiser investor and is protected from wrong doings, wealth creation for the investor and the economy will remain a distant dream. We need to convert a country of savers into a nation of investors.


The problem of adult illiteracy in India is widespread and alarming, however we are aware of it and measures are being taken to address it. The problem of mathematical illiteracy is much less well known. In fact, it is downright obscure – so obscure that there isn’t really a ready-made term to describe the group of people who can’t calculate bank deposit interests or balance their checkbook. Renowned mathematician John Allen Paulos tried to change that in 1988 when he published the book Innumeracy. He described innumeracy as, incompetence with numbers. Innumeracy leads to many incorrect financial decisions. What is the implication of innumeracy? It means people who are innumerate can not:

  • Determine whether a car has enough petrol to get to the next petrol pump, based on a graphic of the car’s fuel gauge, a sign stating the miles to the next gas station, and information given in the question about the car’s fuel use
  • Calculate the cost of raising a child for a year in a family with a specified income, based on a newspaper article that provides the percentage of a typical family’s budget that goes toward raising children
  • Calculate the total cost of ordering office supplies, using a page from an office supplies catalog and an order form.
  • Compare different home/personal loan options and identify which is the best Innumeracy is one of the foundations of financial literacy and unless we tackle this on a war footing we will continue to face financial literacy challenges.

Spreading Financial Literacy

With the rapid growth in our economy and greater number of people having a disposable income that can be invested in various avenues like the capital markets financial literacy is the need of the hour.

About 50 percent of households in the US and Sweden, and over one-third in the UK invest directly or indirectly (through mutual funds and other managed investment accounts) in the stock market. In the Netherlands, Italy, France and Germany the proportion is between 15 and 25 percent, but in each of these countries it has increased quite significantly, sometimes doubling in the course of the last decade. You can imagine the huge impact retail participation will have on the Indian economy, if we can move from the current 4 to 5% to 15%.

We need to have a well-chalked out plan to spread financial literacy and implement it across the nation addressing all strata of society. We need to coordinate with all agencies like the government, financial institutions and educational institutes to make it happen.

Already there are efforts at financial literacy being taken up by banks, financial institutes, and government agencies. If all these efforts can be coordinated and educational institutes can be looped in to launch a national financial literacy mission we can really make a difference.

Like some other counties in the world like Australia, we need to have a national financial literacy policy.

This national Strategy to improve financial literacy should be founded upon the following core principles:

  • Inclusiveness – reaching all Indians, particularly those most in need and future generations of consumers and investors;
  • Engagement – helping all Indians appreciate the importance of financial literacy and that small things done regularly make a real difference;
  • Diversity – delivering learning that recognises the different ways people learn and allows all Indians to participate;
  • Knowledge and empowerment – giving all Indians access to information, tools and ongoing support systems;
  • Improving outcomes – recognizing that information alone is not always enough and using additional mechanisms to achieve better outcomes;
  • Partnerships – mapping and building on existing foundations to fill gaps and ensure all sectors and agencies work cooperatively; and
  • Measurement – evaluating our work to know what is and is not effective, and learning from and sharing these evaluations.

Catching Them Young

Introducing financial literacy in the school curriculum is a must for making India a financially literate nation. Effective integration of financial education into school education is the cornerstone to bringing about long-term generational change in knowledge, attitudes and behaviors. It does not make sense introducing financial literacy as a separate subject and increasing the burden on the student.

We need to:

  • Integrate and embed financial literacy into the National Common Curriculum
  • Ensure sustainability of school programs through strategic partnerships with education stakeholders, professional learning for teachers and access to high- quality resources
  • Introduce interesting competitions and events to make learning an enjoyable experience

( The author is the MD & CEO of BSE Institute Ltd.)

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