4 min read.Updated: 24 Jan 2019, 09:37 PM ISTTarun Ramadorai,Anu Tiwari
Indian households can increase their annual real income growth by altering their financial arrangements
Indian households’ financial arrangements are unique in the international context. As the Reserve Bank of India’s (RBI) committee on household finance report highlights, many aspects of these financial arrangements can be altered in a manner that is beneficial to households.
For example, Indian households have substantial investments in real estate—85% of total assets, on average, which barely declines even as households become wealthier. Most Indian households do little apparent saving for retirement and investment in insurance is woefully low relative to their counterparts in advanced economies. These issues significantly affect household well-being. The report notes that Indian households potentially stand to increase their annual real income growth by up to 10% by making a set of sensible changes to their financial arrangements.
Some of these changes can be difficult for households to implement as a result of legal and regulatory impediments. Moreover, these impediments are often more detrimental for women than for men, leading to important gender imbalances in financial well-being. In this context, we highlight a perhaps surprising connection—between recent changes mooted in family law and their beneficial consequences for unblocking impediments that currently affect Indian household finance.
The Law Commission of India released a consultation paper on 31 August 2018, recommending a set of reforms to family law. The key recommendations include (i) a woman should, regardless of whether she contributes financially or monetarily to the family income, be entitled to an equal share in marriage property; (ii) abolition of the notion of coparcenary at the central level, thus extinguishing the right to property by sheer circumstance of birth; and (iii) abolition of the Hindu Undivided Family (HUF) structure.
To unpack these changes and their implications for household finance, a little further explanation is warranted. Under Hindu law, there is currently the notion of a coparcenary. Coparceners to an ancestral property acquire rights in it upon birth. The share of a coparcener is affected by births in the family, which reduce the available share to each coparcener, and deaths, which increase coparceners’ share. Coparcenary comes into effect immediately upon the birth of anyone with such claims, meaning that the property acquires the nature of an ancestral property (Rohit Chauhan vs Surinder Singh and Ors).
Turning back to implications for household finance, consider the fact that coparceners have the right to demand partition of an ancestral property (B. Chandrakala vs A. Anuradha and Ors). However, in practice, there are often long delays arising from the need to secure agreement between coparceners to dispose of ancestral property. There may also be significant judicial delays in the case that conflicts between them require court resolution.
This is a major friction preventing households from reducing exposure to real estate—the potential for prolonged disputes arising from the coparcenary structure weakens household incentives to liquidate unproductive investments in ancestral property.
Indeed, in areas where ancestral real estate holdings are widespread, this issue has aggregate implications—reducing housing market liquidity as disputed properties are unsold for long periods of time.
Within the HUF structure, there is a strong role for the karta, who is entrusted with the management of family wealth, as well as given the responsibility of the “general welfare of the family’’ (Gurpreet Singh vs Ram Saran and Ors).
Such centralized effective control of jointly owned ancestral assets makes problems more likely to occur. For instance, there may well be changes to the financial needs of individual HUF members over time. Moreover, disputes can arise from undemocratic decision-making if there are differences of opinion over the optimal arrangement of the HUF’s financial matters. However, there is often little flexibility for adjustment, given that the karta embodies strong centralized control over the management of the HUF’s affairs (Subhodkumar vs Bhagwant Namdeorao Mehetre and Ors). This can make streamlining financial arrangements in the face of reasonable variation in individuals’ circumstances or opinions very difficult.
It is imperative to do more to financially empower women. The proposed changes in the Law Commission’s consultation paper also promise positive change in this context, especially in the sense of remedying asymmetries in inheritance rules between males and females.
Why is this important? The life chances of individuals in a society are very different depending on their level of wealth, as the Harvard Equality of Opportunity project documents in the US. In India, where formal social security is inadequate, having claims to inherited wealth, however small, can sometimes mean the difference between financial security and destitution. If men’s claims to ancestral wealth supersede those of women, society consigns women to an inherently inferior financial position.
As the Law Commission’s consultation paper points out, both Hindu and Muslim law need reform to make inheritance truly gender-neutral. One particular area of concern is that numerous issues with the current legal framework make the financial position of widows and unmarried daughters especially fragile. Reforms in this area have thus far been piecemeal and more work is needed until the financial treatment of men and women is truly equal in law.
Reforming laws is not, of course, the only avenue towards better household financial arrangements, but it is an important one. In addition to the other concerns potentially addressed by adopting the reforms proposed in the Law Commission’s report, it is likely that we will see significant improvement in household finance.
Tarun Ramadorai & Anu Tiwari are professor, financial economics, Imperial College Business School, and partner, AZB, respectively