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The Great Advisor

Chidambaram has been giving out some excellent personal finance advice at every opportunity. Unfortunately, few Indians appear to be listening

I don't think any Finance Minister in living memory has given as much as personal finance advice to the people of India as Mr. Chidambaram has. And it’s all unexceptionable stuff that any professional advisor would strongly concur with. Hardly a month goes by without the FM asking people to focus on financial investments rather than real estate and gold. He wants people to invest in equities for the long-term. The only bit one could object to is his desire to see people invest in public sector stocks but then one can hardly blame him for that.

Unfortunately, the people of India are not listening. As a personal finance advisor, the finance minister’s task is truly difficult. The professional advisor has a handful of clients who have voluntarily expressed a desire to improve their finances. However, most of Mr. Chidambaram’s audience does not even know they have a money problem, except for not having enough of it. Moreover, the professional advisor’s job is done when a few of his client do what he advises while the FM’s goal is to improve the aggregate financial choices made by the entire country.

For obvious reasons, his strongest, most frequent and in fact most impassioned pleas are about gold. A couple of days back he actually mused--not seriously, I guess--that if there were no gold imports for one year then the Indian economy would be transformed. That’s true no doubt but such an event is highly unlikely. It could perhaps if there is a sustained multi-year decline in gold prices, a sort of a reverse of what has happened till now. Although, come to think of it, that’s not such an impossibility. In any case, one can’t accuse him of not walking the talk--his own assets, as filed with the Election Commission, have just a small proportion in gold!

Gold apart, other parts of the advice are not doing so well either. Interest in equities, especially from small individual investors is at a low that has now sustained for so long that it’s beginning to look normal. Real Estate is still a desirable form of investment for most people. Many of them might not be able to buy much of it because of high prices, but they have no doubt about its desirability.

I think it’s quite clear that investment patterns and personal finance habits of a large mass of people do not change by exhorting them to the better thing, no matter how beneficial it may be for them in the long term. There might be a small number of driven individuals who will do so but most won’t. The only way Mr. Chidambaram will be able to make a large number of Indians follow his financial advice is to create conditions by which they will become the obvious or default choice.

If people are abandoning financial assets and running after gold and real estate, it’s because of the poor returns that financial assets yield. For most Indians, the financial investment of choice are fixed-income deposits of various kinds. And yet, these now offer no real returns at all. Consumer inflation is running at 9+ per cent and appears to have parted ways with wholesale inflation, to which Indian authorities insist on linking interest rates to. As a result, real returns on many kind of deposits are negative.

As for equity, the idea that a sufficiently large proportion of people will start investing directly in the stock markets is a non-starter, as it should be. However, over the last decade, a huge opportunity has been missed, which would have allowed a mass of people of experiencing equity returns in a safe manner, and that is (was?) the NPS. If the NPS has gotten going in time, mass interest in equity may have been a different story.

People learn by experience, either their own or of those around them. Unfortunately for most, all that stands out is stories of fortunes being made from old real estate or old gold. It won’t be easy to change this.