Costly Ignorance

India’s financial literacy, lower than the world average, will impede its financial inclusion efforts

Despite the success with the opening of Jan Dhan accounts, financial inclusion in India remains crippled, given over three-quarters of the country’s adults are not financially literate. A study by S&P Ratings Services found 76% of Indian adults don’t understand concepts like compounding of  interest, inflation and risk diversification. India’s financial literacy is lower than the global average, and lower than many sub-Saharan nations (though these have a marginally better showing). Given research has shown saving money is better than credit for development, it should be worrying for the country that just 14% adults keep their savings in formal financial institutions. And, with only 14% able to understand risk diversification correctly, whether Indians who put aside money for a rainy day are getting the most out of their money remains a concern.

The study also found that just 26% of the richest 60% of Indians were financially literate while of the bottom 40%, just 20%were financially literate. This shows the pervasiveness of poor financial skills in the country is quite acute across the income spectrum. Thus, no matter how many times the government reboots an inclusion drive, it will be unable to penetrate deeper than just account opening if, among other things, financial literacy remains poor. While Reserve Bank of India is spearheading a financial literacy drive—part of this involves funding and setting up Financial Inclusion and Literacy Centers across the country—there is an opportunity in the spread of mobile telephony in the country to make financial literacy more commonplace, through easy-to-understand mobile learning.

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First published on: 17-12-2015 at 00:51 IST