The Concept Of Paisa Bachao: Why Are Indians Shy Of Investing?

Posted on October 12, 2012 in Business and Economy

By Rahul Mehta:

If you had 1000 potatoes in a year, while you needed only 800 to survive, what would you do with the remaining 200? Different types of people would respond to this in different ways. There are those who would save the 200 potatoes for a rainy day. “What if the next year’s harvest is not all that good?”, they would say. Let us call these the Cat A people. Then there are those who would plant the 200 potatoes, so that they could have even more potatoes the next year, assuming all goes well and the harvest is good for the planted potatoes. Let us call these the Cat B people. Some people would however not be satisfied with this. They would borrow 200 more potatoes, while agreeing to give back 250 potatoes in the next year, so that they could plant 400 potatoes, with the expectation of an even bigger harvest the next year. Let us call these the Cat C people.

Which category do you find yourself falling in? If you find yourself leaning towards Cat A, don’t be surprised. You are not alone. A vast majority of Indians fall in this category. We brace ourselves for the worst: “What if it does not rain the next year and there are not enough potatoes for survival? What if we plant the surplus and it gets infested by pests?”, we ask. And so, we find greater comfort in saving our surpluses rather than risking losing them for the possibility of greater returns.

Numerous studies and surveys have time and again shown the average Indian’s propensity towards saving so as to minimize financial risk. Provident fund accounts and fixed deposits still count for the vast majority of Indians’ surplus funds. “Indians Save, Americans Invest” they say, and quite rightly so. What is the reason behind this incessant Indian desire to save?

One possible explanation could be that we have been brought up this way. Most Indians would feel more than a tinge of guilt if they were to spend their surplus finances. Leave alone spending, even investing hard-earned savings into equity instruments would be tantamount to greed, wouldn’t it? Isn’t that what brought about a recession in the United States?

The fact that such stock explanations and fundamentally flawed analyses work in India indicates a severe lack of financial skills among the people at large. Most Indians are just following traditions and money-management practices that their ancestors did, without thinking for themselves as to why they are doing so. Conventional wisdom passed down through ages extols the virtues of saving and the lack of financial education among Indians at large combines with this to make Indians risk-averse savers.

This is not to say that investing is superior to saving. Investing is attractive because it can be a means of wealth-creation, but then again, wealth-creation is not everyone’s primary goal in life and saving their surplus works out well for many people. However, if more Indians were financially well-educated, there would definitely have been a larger proportion of the Indian population taking well-calculated long-term risks with their money than there are today.