Your idle money is one of the many reasons why India is poor
Posted by: Uma Shashikant on Nov 20, 2017, 06.30 AM IST
The annual wealth report released by Credit Suisse a few days ago holds interesting numbers that highlight the inequalities and idiosyncrasies associated with wealth in India.
It makes little sense to look at the per capita wealth of $5,976 per Indian, when the wealth is highly concentrated at the top. If the top 0.5% that holds most of the $5 trillion of wealth redistributed it all, the per capita number will be actually realised.
Since that is imaginary, the number to look at is that 92% of Indian adults have less than $10,000 in wealth. Not enough to secure retirement; not enough to pay for quality health care; and not enough to secure a good quality of life. We have quite a distance to go and we remain a country of the poor.
The 4.4 million adults with more than $100,000 in wealth are the conspicuous consumers of goods and services that continue to entice the markets, the sellers and invoke envy and aspiration in the minds of the 99.5% of adults who remain outside this circle.
We have issues of equality to address when we allow roads to be dominated by cars; education and healthcare to be devoted to the rich; and public utilities disproportionately assigned to large consumers. Without equitable access to basics we are moving in the direction of becoming a country that is deferential to privilege.
The report points out that 86% of wealth in India is held as property and other real assets. Financial assets are not instruments of choice when it comes to building wealth. This is harmful both to the saver and the nation. Property is indivisible, chunky and expensive to hold and sell. It needs consistent expenses for upkeep, earns a small rental yield, and is unavailable for small ticket needs of a household.
Property also runs the risks of becoming relatively unattractive depending on location and other variables that affect its value. A normal household cannot diversify by holding multiple properties across locations. It is also cumbersome to transfer and divide real assets amongst heirs and beneficiaries.
Financial assets are markedly superior in managing wealth as they have a ready and liquid market in which they can be bought and sold; they can be diversified across many products and issuers to reduce risk; they can be divided and liquidated in portions as and when needed; they cost much less in terms of maintenance and annual costs; and they can be transferred to the next generation without much hassle.
The dominance of real assets in the wealth portfolio is a disappointing feature, even after allowing for self-occupied property as a large asset in personal wealth. The goal of a household should be to relegate property to about a third of its wealth. Another third in debt products will generate income as needed and offer risk protection.
The last third in equities will offer growth and capital appreciation. The balance 10% could be held in liquid assets or other assets of fancy. The skewed asset allocation in the wealth statistics is a big concern. We seem to be blindly building assets for the sake of owning them, rather than using them.
This preference also means that a large chunk of our private wealth is idle and unavailable for use by the economy. Gold that lies in lockers and houses that remain locked are useless idle assets that do nothing for a poor and capital-starved economy like ours. It is like people building small private reservoirs to carve out running water for their use. This still water is not available to the parched lands along the river’s trajectory.
The other statistic in the report is that borrowing represents hardly 9% of the assets. This is a remarkably low preference for borrowings as a means of financing assets or wealth. It is well known that most home loans are prepaid by borrowers,who prefer the house to be unencumbered. Read this along with the worrying reports about bank NPAs and the associated problems, it is easy to see where the work for the banking sector lies. Without the retail lending initiatives that began in the 2000s, perhaps bank balance sheets would be even more risky.
This low leverage represents an opportunity yet to be tapped by lenders. It also represents the heightened risk perception associated with income and wealth. Reluctance to borrow is associated with uncertainty about steady income. As incomes grow and get stable, people become willing to borrow to build assets. Without this benefit of leverage, even that simple act of living in one's own house will remain a distant goal.
The report also points out that much of the growth in wealth over the year has come from appreciation in the value of assets- capital appreciation, exchange rate changes and property appreciation. This means the core growth in terms of accretion to wealth from increased economic activity, translating into higher incomes and deeper ownership of assets is not happening at a scale that at least matches the growth in existing assets.
Building long-term wealth is a dream many households cherish. However, realising that dream is a function of both ability to earn and acquisition of assets that will grow in value. The wealth report tells us that a startling majority of 92% does not have enough to feel secure; it also tells us that most of that wealth is hoarded in real assets with limited use for the economy.
We need a more equitable wealth pyramid, and should not lose sight of these distortions in our eagerness to celebrate that tiny 0.5% of the adult population at the top.
(The author is Chairperson, Centre for Investment Education and Learning.)
Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com. This article appeared in Economic Times dated Nov 20, 2017, 06.30 AM IST