The RBI's household finance committee recently showed that only 5% of the average Indian household's wealth is in financial assets. Critically analyze the reasons and its implications for mobilization of resources in economy.
Published: August 29, 2017
As per the report of the committee on household finance, only 5% of the average Indian household’s wealth is in financial assets. The remaining 95% is in physical assets—77% in real estate, 11% in gold, 7% in durables such as vehicles, livestock, equipment. This trend is very different from developed economies where financial assets proportion is much higher.
One of the major reason behind such investment pattern is the lack of trust in financial institutions. Also, the high share of real estate in household portfolios is not backed by an equivalent share of mortgages in total household debt. In fact, more than 50% of household debt is unsecured, this reflects that there is a high reliance on non-institutional sources such as moneylenders.
The major reasons of the household getting into debt are medical emergencies, natural disasters, loss of crops and livestock. However, more than half households rely on informal sources of funding. These three risks (medical emergency, natural disaster, loss of crop and livestock) are insurable. Despite that fact insurance coverage is very less. As per the report, the main reason is not lack of awareness, but affordability. There should be simple, customized financial products with a default opt-out structure. Allocation of a larger proportion of savings to financial instruments will improve returns and this is an excellent measure for improving financial inclusion
The prime requirement is that there should be adequate income so that people can save and allocate savings to financial assets. Due to poor agricultural productivity farm household’s income is very less & they can’t be expected to save. The need of the hour is to improve farm income along with better financial infrastructure and customized simple financial products.
Model Questions Category: 058 - Indian Economy Issues Relating to Planning