What it means to be financially literate6 min read . Updated: 12 May 2016, 05:29 PM IST
Conservatism, realism, control. These are things financial literacy produces and what RBI governor Raghuram Rajan wants all of us to learn
A few days ago, all the newspapers that come home carried this report: “Reserve Bank of India (RBI) Governor Raghuram Rajan today proposed inclusion of financial literacy in school curriculum." Why? To what end?
Was Rajan merely seeking to educate citizens? Or was he, more mischievously, hinting at financially illiterate politicians? That the reports did not say. Other than this one tantalizing line, important enough to find mention in the headline, there was not a thing in explanation. Perhaps it was for want of space and the pressure of other stories (I understand an important development in the Kangana Ranaut-Hrithik Roshan matter broke that same day).
Whatever the reason, we should hope Rajan speaks of this again to tell us at length what benefit this change will bring. And, perhaps more to the point, what disadvantage this inclusion will remove. Lastly, let’s hope the media reports the detail this time. Till then, let us speculate on what he may have meant.
What is financial literacy? When I began working, at 19, in the polyester business, I was told by one of my customers, an experienced Khatri weaver, to learn to be financially aware and conservative. He was avuncular and helpful and it should be understood that business relationships in Gujarat often last generations.
I asked him what he meant. He thought about it and laid it out: “Interest is real and depreciation is not notional. Don’t count the property you live in as an asset." He said it in Gujarati so the words he used for interest and depreciation were vyaj and ghasaro and property was milkat. After I left Surat, it has always struck me how equipped for modern business Gujarati is, because of its ability to absorb words and concepts from other languages. For example, the Arabic word hawala, which is not a negative word in Gujarati. It is an anodyne term describing a financial instrument, and it is not automatically a synonym for hanky-panky or theft. Or hundi (bill discounting). This sophistication is one reason why even urban Gujaratis do not speak English well: They do not need it to access financial modernity.
My customer’s point was, and not many readers may have anticipated this, that Patels did not know much about how to be fiscally conservative and needed to grasp it. That is absolutely true and it is only a handful of communities which have native financial literacy.
The rest of us need to be educated about it, preferably, as Rajan suggests, in school. In the brief course I did to prepare myself for the textile business, there was a single 2-hour class on accounts and finance. In that class, we were told that there was an end to running a business and it was “to maximize profit".
How? Why? What happened when there arose a conflict between this goal of maximizing profit and ethics? What about goodwill and sustainability? This the fellow did not dwell on and we were not mature enough to ask interesting questions.
A few years later, I had maximized not profit but loss. Liberalization in 1991 had knocked the stuffing out of us manufacturers exposed to Chinese and Korean competition. Then, in an adult education course one weekend, I was told something else. It was that profit was notional and what really mattered was cash flow.
This made me sit up. By now, I knew what that meant, particularly in the subcontinental context, where receivables have a certain elastic nature. It is remarkable to me that even in such a nation, the stars of industry are rarely those who properly grasp finance: Let us be honest, it is not chartered accountants but MBAs, masters of business administration, who dominate the lists of chief executives.
Lee Iacocca turned Chrysler around in the 1980s and wrote about how he did it in his autobiography. He said he did not come from the more glamorous side of the automobile business, marketing, but something more mundane. I read the work decades ago and cannot recall the details but I think it was in distribution or sales, if not the shop floor, that he cut his teeth. His point was that then, as now, it is the flashier parts of the business from which leaders are drawn.
We think of advertising as being centred around fancy-pants creative directors, but they are incidental to the business. It was an accountant, Martin Sorrell, who understood true value through the books. Armed with that knowledge and his grit and talent, he is today owner of many, if not most, of the world’s most famous advertising agencies.
When he comes to India and is interviewed, I notice Sir Martin doesn’t talk so much about some great jingle that sold cola or underwear but about matters like rent ratios to revenue being unacceptably high in his Indian offices.
In our traditional business families, the skill taught first and most rigorously is not negotiation or sales but accounting. In his autobiography Swantah Sukhay (For My Own Pleasure), Basant Kumar Birla says he did not understand the technology of his many factories. Happily, that did not matter, because “arthik niyantran mera achha hai (my control over finance is sound)".
I have described the style of the Birla geniuses before, but some of it merits repetition. B.K. Birla’s main instruction to his staff was that hisaab kitaab be kept up to date with clean and detailed entries. The result of his knowledge was that “meri companiyon mein lambi-chaudi gadbad nahin hui (there’s been no major trouble in my companies)." He writes that he was taught accounts as a boy under a man called Shantimal Mehta, a fellow Baniya (Mehta is the word for accountant).
A one-year programme was made for him by his father Ghanshyam Das (and because of it he clearly picked up something we did not in that single class). He was taught cash, copying, accounting, raising bills, understanding bank statements, daily reports, daily and annual profit and loss accounts, savings and expenses, and sales.
He writes that his employees often said it was not possible to pad numbers because he would catch the fudge. Before the 12th of each month, he would examine the books of the previous month. It is this discipline that made him a long-term success.
It is the absence of such knowledge that very often makes financial wrecks of companies with a competent product. Take a look around you at the disaster that taking on excess debt in the expectation of unreal growth has resulted in for companies across India. In times when debt was easier to raise, many businessmen, who should have heeded the cold reality of their books, were seduced by a warm fantasy (India Shining).
And it isn’t just about businesses. Not a few readers will know of salaried folks who have failed to understand even the usurious nature of their credit card debt, though they are quite aware and bright otherwise.
Conservatism, realism, control. These are things “financial literacy" produces and what the RBI governor wants all of us to learn. Or at least that is what I think he meant.
Aakar Patel is the executive director of Amnesty International India. The views expressed here are personal. He tweets at aakar_amnesty.