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The Freedom To Choose

The Freedom To Choose  The urban Indian has seen an explosion ofoptions before him over the last decade in every aspect of his
Where were you in 1998? How much did you earn then and how did you invest whatever you saved? How did you react to the news of the Pokhran nuclear blasts? Did the indifferent stockmarket or soaring prices of onions that year make any difference to your life? Often, our view of the past depends on the vantage point of the present that we view it from. Such has been the transformations of the urban Indian landscape, the lives of urban Indians and their financial world that it will be surprising if you don’t find your life in 1998 very distant and terribly detached from your present.

In 1998, India was a country coming to terms with its status as a nuclear weapons state and grappling with international sanctions that followed the tests. It was experiencing middling economic growth, witnessing a gyrating Sensex and rising prices. We were a people wanting to enjoy the fruits of the tree of economic freedom that had been planted with the initiation of economic liberalisation in 1991. But despite our best jumps, they remained out of reach.

Endless national income statistics thrown at us by the government and the media have told us time and again of the progress India has made in the last 10 years, but have not managed to tell the real story of urban India: how we, as a people, have now finally enjoying our economic freedom and how it has changed us.

In the last decade, and more so in the last five years, the psyche of “will we?” of the doubters and “we can” of optimists has transformed into a mass psyche of “we surely will”. The difference between then and now is the confidence and faith we have in ourselves. This comes in a range of our everyday behaviour—the way we earn, save, invest, borrow and spend. We now know that we and our country can earn well and be prosperous.

We know that India can take a realistic shot at becoming an economic power within our lifetimes. We have now seen how higher disposable savings allows us to take higher investment risks and go where our parents would have feared to tread: equity mutual funds and stocks. The recent past has proved to us that with a regularly rising income, and not a great horoscope, we can unlock the doors of our dream home. We are now sure that we will be the most travelled people in our lineages and not just read about must-visit destinations in travel books.

The increasing economic freedom has finally started translating into increasing financial freedom for all of us. It is this prosperity of the urban mass affluent, who constitute a large chunk of the 32.5 million taxpayers, that will fund India’s explosive growth by paying income taxes and investing in mutual funds and the stockmarket (these funds will make their way into infrastructure and other areas), and provide security and stability to the country’s finances by buying insurance. The buying power of these people will power the growth of multiple industries as it buys homes, cars, consumer goods and subscribes to a long list of existing and new services.

As the country celebrates its 61 years of independence and Outlook Money celebrates its tenth year, it is only apt that we study in detail in the stupendous progress in the lives of people like us, the dramatic change in whose lives since 1998 has often been talked about, but never really studied in depth. Therefore, Outlook Money and Indicus Analytics conducted The Spirit of Freedom Survey over 1,947 respondents in 334 cities and towns during July 2008 to find out the changes that have occurred in six major areas of personal finance: income, taxation, consumption, insurance, banking and credit, and investment. The results quantify the changes, or the lack of them. While it put numbers to some of the changes that are obvious, it did have its surprises too, especially in the extent of the change. Having been too close to the transformation we have sometimes failed to recognise its magnitude. To find out what the results have in store, read on. A word of caution: get ready to be startled.

Money talks and it has talked a lot for urban Indians since 1998. Higher incomes have given people unprecedented levels of confidence to manage their financial lives. Over the last decade, the Indian economy has grown like never before. From a GDP growth rate of 6.5 per cent in 1998-99, after a dip to 4 per cent, it peaked at 9.6 per cent in 2006-07 and was 9 per cent in 2007-08. This was facilitated to a large extent by the lifting of controls on industry. Opening up of what were state monopolies, such as telecommunications, created jobs at a hitherto unseen pace. During this time, too, the services sector, which includes retail and IT-enabled services, came to its own and started racking up double-digit expansion rates. Between 1994-95 and 1999-2000, urban non-agricultural employment was growing at 3.13 per cent, and at over 4 per cent thereafter. 

As a natural fallout of this, our average monthly household income, as our survey indicates, rose from Rs 19,952 in 1998 to Rs 42,676 in 2008. There is also a clear differential between two sets of locations as far as average monthly household incomes go. Those of us who live in Delhi, Mumbai and Bangalore are in the Rs 48,000-51,000 range, while in Kolkata, Chennai and other cities we would possibly be earning Rs 37,500-41,000.

With higher confidence in our earning potential, more of us are taking the risk of striking out on our own, as the swelling ranks of the self-employed corroborate (see Income).

Much of the higher tax revenues that government boasts of today has come about due to higher incomes of individuals and corporates in the last decade. During the 1980s, the government started giving the big bad taxman of the 1970s a makeover. By 1992-93, the slabs were down to three and the maximum rate to 40 per cent. Then finance minister P. Chidambaram’s Dream Budget of 1997 cut the rates further to 10, 20 and 30 per cent, where they remain today, although the slabs for which they apply have changed. So, by 1998, except for minor tweaks here or there, the scope for big changes in terms of legislation on the tax front was limited.
The underlying principle of the tax reforms was that the simpler the structure and the more moderate the rates, the more of us would comply. This has been the other major factor in boosting tax payments and revenues. That has been borne out by the growth in the number of taxpayers. The survey reveals that the proportion of people not filing tax returns has fallen from 9.4 per cent to 3.1 per cent, although it could be in part because of the growth of income incomes has far outstripped the progression of tax slabs.

As for e-filing, among the metros it seems to have gained greatest currency in Bangalore—10.2 per cent of the respondents used this—perhaps predictably, with its large number of tech-savvy individuals. Kolkata was next with 9.20 per cent.

High and rising incomes and low tax rates have created rising disposable incomes in the last 10 years. That’s a perfect recipe to trigger a spending boom. It is no surprise that the transformation that has happened in the post-liberalisation era has become visible in the products and services that we buy today compared to what we bought 10 years ago. After all, wealth shows primarily in expenditure. We are climbing, albeit at varying speeds, up the pyramid of needs. From a plain vanilla life, where more things we aspired to own were outside our reach, we have come to a stage where more things are within our ability to own.

From the latest cars to gadgets to clothes to accessories, there are few things that are not on sale in India today. Resplendent luxury homes are freely available. And we are more likely to know someone who has been on a holiday abroad than we would have been in the past (see Consumption).

We have also taken to information technology in a very big way. Today, 79.90 per cent of us own a computer compared with 17.60 per cent 10 years ago, registering a more than four-fold growth. With it has come the proliferation of the Internet with 70.80 per cent of respondents connected to it compared with 11.50 per cent earlier.
The other gadget that has caught our fancy is the telephone—the average number in a household has more than trebled from 0.8 to 2.7. Today, just 1.4 per cent of us did not own some kind of telephone compared with 45.70 per cent a decade ago. 

Personal transport also seems to be fairly high on our list of purchases. Car ownership has doubled, while that of two-wheelers is one-and-a-half times the number it used to be.

The desire for the better things of life spills over into entertainment gadgets and white goods too. The digital still or moving image camera, too, has become ubiquitous with half the respondents owning one. Those apart, four-times the number of people in 1998 have air-conditioners installed at home, double the number have washing machines, the refrigerator trails only the mobile phone in ownership rankings, and about half the respondents have microwave ovens.

What does stick out as an oddity in the midst of this spurt in consumption is the increase in home ownership, or the lack of any significant change there. Two-fifths of the people still live in rented accommodation, a marginal drop from the figures 10 years ago.

When you earn more and accumulate more assets, the stakes get higher and there is more to protect. Luckily for Indians, the opening up of the insurance sector in 1999, and the explosion of insurance products has helped Indians in this respect. The survey indicates that the insurance penetration seems to be increasing, a likely fallout of the opening up of the insurance industry to private Indian as well as foreign companies. In 1999, the sector was opened up and the monopoly of the Life Insurance Corporation in that particular business and that of the General Insurance Corporation, with its four subsidiaries, in the non-life insurance business has made way for stiff competition. At last count, there were 21 life insurers and 20 non-life insurance companies operating in India.

With each of them vying for a share of the market and hardselling their products, the penetration has increased. Look at life covers. Compared with almost 60 per cent of the population without a cover in 1998, the number has gone down to about 22 per cent now. We are using insurance more for protection than earlier with about 60 per cent of the population now taking term insurance covers compared with a rather low 29 per cent a decade ago.

There are other problems too. Overall, we are terribly underinsured. While minimum life cover should be at least five times our gross annual income, which has about doubled over the decade, the average insurance covers has increased from Rs 11.39 lakh to Rs 13.31 lakh—marginally at best. Worse, 56.7 per cent of us have covers less than Rs 10 lakh, which is certainly not enough to give financial security to someone who survives an earning member. By that measure, we have insured ourselves for far less than what we need to.

One thing, however, we are becoming aware of is health insurance. From 15.8 per cent who had health insurance, the number has trebled to 47.7 per cent. Given the rising healthcare costs, that still leaves about half the population concerned completely exposed to risk even though they can well afford to protect themselves against it.
The biggest problem, however, seems to be the attitude towards insurance. We are yet to shake off the hangover of the pre-liberalisation days, when insurance, because of the tax breaks it afforded, despite low returns, was a favoured destination for investment. Today, that mindset has just become stronger with 57.6 per cent of us citing tax breaks as the reason to buy insurance as opposed to 26.2 per cent in 1998.

Simultaneously, however, 63.4 per cent of us have said that we buy insurance for protection, a number vastly better than the 35.10 per cent 10 years ago. Further, with a third of us saying that it is an easy way to invest, it is clear that it is going to be difficult to change our attitude towards insurance. The idea appears to be that insurance is something you buy for returns and get some protection in the bargain. That is scary, to say the least.

Periods of high income growth creates optimism about future incomes and provides people with the confidence to use a part of that stream to fund the present, something that loans do. For banking and credit, this has been a major reason behind the credit boom witnessed by it. Banking was one of the sectors to be opened up in the early years of liberalisation, it was also one of the early ones to turn ruthlessly competitive. 

Banks tried various means to improve the experience of the customer by giving us faster and easier access to our money and relationship-related information at our own convenience. The other reason for doing so was to bring the cost of a transaction to the bank down.

So, we have, along with the traditional channel of access, the branch, started using the many alternative channels that banks have made available to us over the years. The automated teller machines, or the ATM, is a prime example: compared with 22.10 per cent of us who used it in 1998, 86.5 per cent use it today. The increase of online access, stories of security breaches notwithstanding, has increased five-fold-plus, from 12 per cent to 64.2 per cent over the same period.

Finally, after we have used whatever we needed of our disposable income, we have invested. We have made some significant shifts here too. We are not fixated on fixed income instruments as much as we used to be (See Investment) The non-investing population among us has also declined from about half to a fifth, which shows that more of us have enough to take care of our needs and then some—and we are investing the surplus.

Apart from those mentioned above, we have parked our money in a variety of options. Half of us have invested in mutual funds, a huge shift from the 17 per cent in 1998. Of them, the top priority seem to be equity funds, with tax breaks (34.2 per cent) and without tax breaks (37.9 per cent). To that extent, we have our priorities right. Balanced and debt funds do not find much favour with us. Nor, unfortunately, do exchange-traded funds, which usually have the lowest expenses among mutual funds.
We are also less shy of leveraging our future incomes and borrowing. The bothersome bit is that 29.2 per cent of us have taken personal loans, a chunk even bigger than the 21.6 per cent who have borrowed to buy homes. A bulk of these seem to be bridging the gap between asset-backed loans and expenses to be incurred over and above that amount. What comes as a bit of a surprise is that we are still depending on friends and relatives as much as personal loans for bridge funds. The positive thing is that the proportion of us borrowing to finance non-asset-creating activities, such as weddings, has remained almost flat over the decade.

So, there we are. We have changed, for better, or for worse. We have become financially savvier in some respects, but failed to evolve in some others. We need to seriously take a relook at some of the ways in which we use our cash or get it in the first place. We are some way from becoming our smartest personal money managers, but we are surely on the way. 

The survey provides unimpeachable evidence that we are financially freer than a decade back. With the process of liberation only expected to continue, we will be scaling new summits and seeing the world from new vantage points. When we wondered about our future in 1998, we couldn’t have imagined the position we find ourselves in 2008. Israeli philosopher Martin Buber had once said, “All journeys have secret destinations of which the traveller is unaware of.” If urban India looks back at the last 10 years, it can celebrate the secret destinations it has reached and look to the future with hope of experiencing the exhilaration of reaching many more.
  • Average monthly household income has risen from Rs 19,952 in 1998 to Rs 42,676 in 2008
  • Ownership of PCs has grown about three-and-a-half times to 79.90%, and 71.70% have connections to the Internet
  • Just 1.4% of the respondents do not own a telephone and the average number of connections has risen from 0.8 in 1998 to 2.7
  • Grocery shopping 1998 2008

    At local market 92.60 77.60
    At large retail chain 10.10 70.80
    Home delivery 16.00 38.00
    Haat/Hatia* 27.90 24.30

    *weekly markets


    1. Telephone
    2. Refrigerator
    3. Television
    4. Computer
    5. Internet link
  • The proportion of people investing in equity mutual fund schemes has increased four-fold, from 9.6% a decade ago to 37.9% in 2008


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