In the past decade, officials across the country have demonstrated a keen interest in the topic of financial literacy, irrespective of their country’s economic development. In India, financial literacy and financial inclusion are interrelated facets of a unified idea. Financial inclusion refers to the provision of necessary banking, insurance, and credit services to the portion of the Indian economy that is currently not served or neglected. This aims to integrate them into the official financial system. In contrast, financial literacy primarily emphasises the consumer’s perspective. In essence, if consumers are not cognizant of the indispensability and advantages of acquiring financial services, they will not manifest an inclination for those services. Hence, financial literacy is necessary not just for the growth and development of the economy, but also for achieving financial independence.
Our country has a well-established tradition of displaying a pronounced proclivity towards saving. Nevertheless, we opt to allocate our funds towards conventional financial instruments that frequently yield meagre profits, which prove inadequate in matching the inflation rate. Hence, we demonstrate competence in the art of frugality; however we have a deficiency in the skill of financial investment. Let us examine the Indian kids, who commonly depend on their parents for financial assistance throughout their college years, in contrast to other developed nations. College is a pivotal stage in a young individual’s life, as it represents the shift towards economic autonomy from their parents and the adoption of greater accountability for making prudent financial decisions. The final phase of the college period holds significant significance for young folks as they are about to enter the labour market with no knowledge of personal finance.
Indian policymakers have continually made efforts to improve the financial literacy of young students for three main reasons since the beginning of the previous decade. Financial literacy can help young children develop positive and responsible financial habits, which will benefit their financial well-being as adults in the current financial industry. In addition, the contemporary dynamic economic landscape, marked by intricate financial goods and services, poses a more significant difficulty in the management of personal finances. This is especially applicable to young college students who are moving from being financially reliant to becoming independent as they join the labour market and become important customers of the Indian financial system. Moreover, the younger generation plays a pivotal role in the progress and prosperity of a nation. In India, the young population, defined as individuals below the age of 35, makes up 66 percent of the entire population, totalling 808 million people. More precisely, the demographic segment comprising those aged 15-29 accounts for 24 percent of the total population, corresponding to a staggering 365 million individuals. India has the largest young population in the world.
A significant number of college students currently experience financial challenges, including the absence of insurance or insufficient insurance coverage, accumulating debt by borrowing from acquaintances or relatives, heavily relying on credit cards, encountering insufficient funds at the end of each month, and lacking investments beyond a basic bank account. Financial illiteracy is the fundamental reason behind all these problems, stemming from a deficiency in knowledge and comprehension of personal money. Financial literacy refers to a deep understanding of essential economic principles that are crucial for making well-informed financial decisions regarding spending, saving, investing, and borrowing. It includes understanding of market principles, instruments, organisations, and laws.
Financial illiteracy, characterised by a low level of financial literacy, results in a dearth of prudent financial reasoning, a weakness in fundamental financial understanding, and difficulties in applying financial knowledge. Individuals with a deficiency in financial literacy either opt to disengage from financial affairs or rely on unreliable sources for financial knowledge. An analysis of this matter can lead to the improper distribution of personal assets, which can lead to a deterioration of society and a rise in government expenditure on social security. The current body of research in the domain of financial literacy suggests that a lack of essential financial information often results in an inability to understand basic financial concepts and a lack of wise decision-making in financial matters. This can lead to insufficient financial management, which can burden households with debt and ultimately lead to drastically diminished living standards. This can result in heightened financial burden and elevated rates of absenteeism in the job. Hence, the absence of financial knowledge and skills poses several perils to individuals, society, and the economy.
Financial literacy involves making informed decisions about spending, saving, investing, and borrowing. Additionally, three phases of equivalent literacy can lead to total financial literacy: Three types of financial literacy exist: traditional, mathematical, and product. Standard financial literacy involves understanding basic financial language and principles. Mathematical financial literacy applies math to finance. Product financial literacy is understanding the pros, cons, and potential outcomes of different financial instruments and making informed decisions. Thus, conventional, quantitative, and product financial literacy helps people to make informed financial decisions.
Financial obligations have increased due to changing family dynamics in India. Traditional Indian homes’ shared family setup hindered financial communication. Nuclear families with fewer members have become more common. In these households, a male adult manages the family’s finances with help from other adult family members. Individuals and households in the modern nuclear family make financial decisions about spending, saving, investing, borrowing, and other things. The current generation of young adults must take more responsibility for their personal and household finances than in the past.
Customers have more alternatives from multiple providers and delivery channels due to the extensive availability of financial products and services. Deregulations, liberalisation, and increasing financial risk, together with risk mitigation strategies, have led to the emergence of new financial products and services for targeted demographics. Financial product and service innovations offer consumers several options for spending, saving, investing, and borrowing. These opportunities were unavailable to previous generations. Younger generations must understand these advancements since they give customers more options and make it harder to discern their benefits and drawbacks.
Private companies offering standardised and bespoke financial solutions have grown in the previous 20 years. Financial products and services are becoming more sophisticated, making customer decision-making more complicated, especially for younger generations. Credit services like loans and liabilities support current spending based on anticipated future incomes, whereas savings and investment services transfer current income to future consumption. Financial needs and resources at different life phases determine a person’s financial service purchases.
Artificial Intelligence has revolutionized financial product processing, marketing, and delivery. The internet has helped financial service companies transcend consumer geographical boundaries. Financial literacy does not guarantee the “accurate” choice, as individual and cultural factors also influence decision-making.
Young people today need financial literacy to compare financial possibilities. Financial literacy helps customers understand and manage risk, make informed decisions, and understand their rights and duties. Financially literate customers increase demand for financial services, promote proper use, and boost economic growth. They can also help the government and policymakers create a more competitive and efficient financial sector.
(Dr. Firdous Ahmad Malik is Assistant Professor of Economics, Department of Management. University of People, Pasadena, California, United States. Email: [email protected] and Dr. Harsha Jariwala is Assistant Professor, Finance and Accounting. Institute of Management Jammu, Email:[email protected])