Financial Literacy in India
Author- Yogetha Madhukunta
Financial Literacy and its components
1) Rani and Siwach (2023) presents Financial knowledge, financial attitude and financial behaviour as the components of financial literacy. The co relation between financial literacy and its three components is essential in determining an individual ‘s decision. Age, gender, education may affect how an individual considers the three components, which will ultimately determine his/ her financial literacy. A sound financial decision can lead to financial well-being, this means financial well-being is determined by an individual ‘s financial literacy, there exists a positive relationship between them. An increase in one will result in an increase in the other.
Reasons for poor financial literacy
2) Rath and Patra (2023) states the reasons for poor spread of financial literacy in India are inter-state disparities, training and awareness. Various other factors like income distribution, population composition, poverty, education pattern of the states influence the financial literacy of the individual. With states or regions having strong education system, the individual seems to be comparatively more financially stable, states with a major proportion of population under poverty, experience poor financial literacy as the flow of savings, investments and capital formation is slow. The acceptance of financial literacy vary from state to state or region to region due to changing nature of the affecting factors.
Education’s influence on Financial Literacy
3) Agarwalla, et, al. (2013) states that with the education levels of the young population being fairly high, the financial literacy seems to be inadequate. This is because unavailability of financial literacy inputs in the education system. The education system lacks in imparting the basics of the financial system in the schooling stage. Considering the growing importance of education in the evolving Indian society, the problem of inadequate financial literacy can be solved by introducing the relevant inputs or materials in the education system. This will help in creating a base for financial literacy for the students which in turn will be beneficial for them in the future.
Financial Literacy and its impact on savings, investment and diversification.
4) Mohta and Shunmugasundaram (2022) states that Financial Literacy helps an individual in facing the hard financial times, this is because he/she very well understands the importance of savings, investment and diversification. In today’s dynamic world, a person with a sound financial mind can sustain, but a person with poor financial literacy will have a hard time facing and overcoming the various financial burdens. Thus, it can be rightly said that savings and investments along with diversification, create a support system for an individual and act as a fuel in driving financial well-being.
Financial Literacy and Decision Making
5) Biswas and Gupta (2021) presents that for a household, financial literacy affects it’s saving decision, investing decision, borrowing propensity and the credit worthiness. A financially literate household will focus on savings and converting it into investments. And the household may even resort to considering credit instruments. Financial literacy influences the household’s decision in various financial decisions, the household sees to it that it maintains a proper balance between the various financial instruments. Financial literacy determines how a household will take decisions considering the resources it has and the various options available for it.
Financial Literacy and its impact on the policies
6) Basutkar (2016) presents that the policy makers are giving importance to educating the general public in the area of financial matters. This is because, the understanding of the general public of the financial aspects will affect the success of the policies related to finance. If an individual is financially illiterate then he/she will not be able to evaluate the benefits he/she can derive from the financial policies. The policy makers rely on the general public’s acceptance towards the policy, for the effective utilisation of the policy benefits. The acceptance from the general public in turn depends on their understanding of the financial matters and their exposure to the financial areas. Thus financial literacy can be considered as a factor in framing the policies.
Demand creation through Financial Literacy
7) Singh (2018) emphasizes that Financial literacy also acts as a determinant of demand for financial products and services. This demand leads to financial inclusion. Consumers will demand for the financial products or services only if they are aware about it and are able to measure the welfare derived from it. Here, the major problem is lack of information, consumers are unaware about the various financial products and services. Due to this, they fail to understand their demand. Failure in demand identification leads to poor financial inclusion by the people. Thus, financial literacy creates demand for financial products and services, boosting financial inclusion.
Financial Literacy and Financial technologies
8) Mishra, et, al. (2024) states that Financial literacy also includes utilisation of digital devices, applications, and online platforms such as communication channels, information retrieval, critical thinking, problem solving and creativity. This means in today’s world, an individual should be digitally literate too, he/she should be able to fetch information from various digital sources and evaluate that information. With the introduction of numerous digital finance technologies, an individual should continuously update his knowledge and skills. Here, importance should also be given to protecting financial privacy and security in the digital spaces. A financially literate person should be technology driven so that he/ she can use his/her skills for generating the benefits in the digital spaces too.
Financial Literacy in rural areas
9) Gautam, et, al. (2022) states that Financial Technology influences financial literacy not only in the urban areas but also in the rural areas. The traditional cash payment system is slowly replaced by the digital financial services in the rural areas. Adoption of smart phones helps in widening the rural population’s exposure to various financial services and the financial schemes launched by the government. Often, the rural population is debarred from the benefits of the government’s financial policies, but with the help of digital transformation, they can learn and update themselves leading to rural economic growth. There seems to be a positive relationship between usage of financial technology and financial literacy, better the usage, more will be the literacy
Financial Literacy and Financial Inclusion
10) Pandey, et, al. (2022) presents that by improving financial literacy, financial inclusion can be achieved, which means that financial literacy acts as a pathway to acceptance and access for various financial services. This will result in economic growth, expansion opportunities, availability of more and better financial services and optimum utilisation of the resources. There exists a positive relationship between financial literacy and financial inclusion, increased financial literacy leads to improved financial inclusion. If an individual is financially literate he/she will include himself/herself in the conversion cycle of savings and investments.
Conclusion:
Financial literacy is emerging as a driver of economic growth. Also, financial literacy helps in creating demand for the financial products and services, making the financial markets strong. This is not only for the urban areas but also for the rural areas, financial literacy helps in enjoying the benefits of the financial markets through financial inclusion. But, the challenge is to make financial literacy reach to all the parts of the society, the major reasons for poor or fluctuating financial literacy are inter-state disparities, education, income distribution, awareness, barriers to technological advancements and availability of resources. The government, central bank and the related organisations are making continuous efforts to improve financial literacy of the general public. With the changing attitudes of the general public, a wider acceptance of financial literacy can be observed. People are also using their digital skills to derive maximum benefits from the markets. Developed financial awareness may prove to be useful in reducing the exploitation to the people by the private money lenders in the unorganised markets. Financial literacy is the gateway to financial inclusion which in turn leads to economic growth. The focus should be on strengthening this gateway so that the path of economic growth is widened.
References:
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Basutkar, Tirupati, 2016. “Financial Literacy in Urban India: A Case Study of Bohra Community in Mumbai,” MPRA Paper 70272, University Library of Munich, Germany.
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