Want to Earn! But Ready to Learn?

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Design and Photo Courtesy : Shruti Shirhatti

Welfare, politics, elections and economics are correlated in amusing ways. As election approaches, politics of welfare rises. Marketing tools are being used immensely by political parties to convey their messages. Ruling party leaves no stone unturned to portray their clean image, while opposition strives hard denigrating the former. In this fight, the list of false claims and assurances goes endless. Such claims and statistics do not affect the chances of winning election, as was proved by recent US elections. People get swayed away by candidates’ speeches and fall prey to their bombast talks. In my opinion, they become successful in hypnotizing commoners due to lack of correct information available with people. It could also be blind trust on politicians which discourage people from verifying the veracity of information. This is what we call asymmetric information in economics.

Financial Illiteracy:

Ranging from bank accounts, compound interest all the way to share market, financial illiteracy contributes largely to the circulation of imperfect information in the economy. We must be very careful while accepting any product, policy or argument as there are many bluff masters keeping an eye on you and your understanding. Strangely, every person in the world wishes to earn money but does not learn about money. Financial illiteracy is very rampant and pervasive in every country.

Facts and Figures:

Let’s have a look at these self-explanatory reports and experts’ views on them –

  1. S&P’s ‘Financial Literacy Around the World’:

It conducted survey on understanding and knowledge of four fundamental concepts viz. Numeracy, compound interest, risk diversification and inflation.

Financial Literacy: A Country-by-Country Breakdown (Excerpt)

Country Financial Literacy (%)
Yemen 13
Afghanistan 14
Albania 14
India 24
Pakistan 26
China 28
USA 57
UK 67
Canada 68
Israel 68

  1. Post-Crash Economics society at Manchester University and pollsters YouGov’s report

This survey was conducted two days before general elections of 2015 in UK. It asked questions such as definition of GDP, deficit, public debt, quantitative easing, etc. 60% failed to offer the correct definition of GDP when five choices were given. A quarter said that they did not know. A researcher of the project said, “This status quo is a grave threat to our democracy.”

  1. USA’s FINRA Investor Education Foundation’s report

In a five-question test of basic financial literacy, only 37% of participants correctly answered four or more questions. Mike Zaino, a founder of TZG Financial in Charlotte, N.C, when asked about this said, “The financial literacy problem in the United States is in such a toxic state, because citizens have failed themselves.” He added, “It’s up to Americans to educate themselves on money and finance. Wall Street and the U.S. government should stay out of financial education.”

Curious case of India:

Instead of going through reports, let us analyze India’s readiness to financial knowledge through couple of examples. These examples relate to various political comments and opposition to economic policies.

  1. Latest on demonetization – by many opposition leaders:

On 8th November 2016, demonetization was announced. Within a week SBI, the country’s largest bank, wrote off loans of 63 willful defaulters aggregating more than Rs. 7,000 crores. Opposition started interpreting it as loan waiver and opposed this move. They got chance to criticize demonetization as anti-poor or pro-corporates. There were several questions like why farmers’ loan was not waived, was demonetization implemented to waive business tycoons’ loans, etc. People were told that their money which got deposited in banks would now be lent to corporates. Thus, fear and panic signals were spread. However, the fact is something else which needs to be understood.

Firstly, we must understand the functioning of bank. Banking involves acceptance of deposits for lending activity. The amount which gets deposited in banks is always lent to businesses and individuals. So, the amount which got deposited in banks on account of demonetization would also be lent to business and individuals.

We must understand the difference between loan write off and loan waiver. Loan write-off is a routine task carried by every bank in order to clean their balance sheets. But it does not apply to every loan category nor is the decision taken in haste. Only those loans are written off which are classified as loss assets by the banks. Banks classify loans as loss assets when they are non-performing assets for more than three years. It means that recovery of these loans is very difficult and hence banks remove these loans from their balance sheet to reduce their burden. Banks can continue recovery process even though loan is written off. On the other hand, in case of loan waiver, banks cannot recover any amount after the loan is waived. Generally, we see waivers in case of agricultural loans.

Going back to basics, banks have a liability to pay deposit holders while loans are assets of the banks. Currently, bank acquired lump sum deposits from people on account of demonetization. They have excess money which can be lent now. Bank pays interest on deposits while receives interest on loans granted. Interest rate on loan is always higher than interest rate on deposit, thus net interest earned is the profit.  Loan write-off and waiver are accounting treatments and not a result of demonetization. Deposit holders need not worry as their money is safe with bank and can be withdrawn once restrictions are removed.

(Read more about write offs – http://wap.business-standard.com/article/finance/5-things-you-need-to-know-about-bank-write-offs-116021200192_1.html)

  1. U-turns after taking charge:

There are many examples where BJP changed their stance on important economic events after coming to power. NDA ruled states were against GST while UPA was at centre and now there is complete U-turn by BJP and Congress parties both.

When in power, Atal Bihari Vajpayee (NDA Prime Minister) proposed changes in FDI policies which were staunchly opposed by others. Later, UPA government proposed similar changes in FDI policy which were opposed by NDA and failed to implement them again. Now, NDA under Narendra Modi proposed and implemented those changes as there was full majority to his party.

FDI discussion stage is very sensitive for people in India. Politicians are the cause for making us xenophobic against foreign investments in India. Whenever a party is in opposition, it opposes FDI proposals for the reasons like national security, loss to domestic industries and unemployment. When ruling, the same party would propose such policies in the name of development.

Even in case of GST, the original bill (as proposed in 2009-10) set tax rate as low as 10-12%. Had it been passed then, scenario would have been different now.

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Photo Courtesy : Pixabay

Conclusion:

Postponement of economic decisions has a cost in itself. But the lust of power veils politicians’ rationality. Our ignorance is bliss for them. But brushing the cause off on politicians is an irresponsible view as our welfare is at epicenter.

As stated above, either we lack information due to illiteracy or apathy of learning. Both scenarios are perilous and affect not only elections but personal lives and economies too. Those who don’t know could be taught but what about those who do not wish to learn. There were 17% respondents who ticked “economics is out of my hands so there isn’t any point in discussing it” in the abovementioned UK survey.

Let’s take a step forward to make people aware about financial knowledge, decisions and government policies. Commonly used term in the information technology world, ‘Garbage In, Garbage Out’ underscores the importance of accurate and quality data to get the desired output. Same is the case about money. Your thoughts and decisions are the result of the knowledge and information you have. So, the next time you buy, vote or argue, please ensure you have correct information. Happy Learning! And Do Vote!

 – Swapnil Karkare

Photo Courtesy (Photo No. 2) – https://pixabay.com/en/read-reading-book-reader-education-1342499/

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2 Comments Add yours

  1. Aditi Verma says:

    I think Economic education should be inculcate right from childhood So that lack of Financial understanding can be minimised. Government should take more initiative towards it and Parents too should guide their offsprings to develop a habit of reading Economic and finance related newspapers.As it would lead to have better stability in rising country future.

    Liked by 1 person

    1. econGully says:

      Absolutely right. But that’s also bit mysterious. Parents and teachers need to be inquisitive. People generally have apathy towards this subject. RBI, SEBI and governmental agencies do a lot. But political parties don’t want people to be aware of such things. So efforts from government are less.
      Also, people does not have this attitude. Children are kept away from financial matters at homes. Smaller steps like filling account opening forms, updating passbooks, renewing FDs, etc. could be delegated to matured children. This way they could get some insight about banking. But “technology” does a problem here. All these things are done online nowadays. So children don’t get these exposures. I remember updating passbooks in my childhood (I sound like old man… but yeah).
      Lets hope for the best.

      Like

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