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Bindu Ananth
I explore how finance can be a force for good

Why the land and gold obsession of rural Indians may be entirely rational

What does the asset allocation look like for people living in remote rural India (villages with less than 5000 population)? My colleague Sowmya Vedula and I looked at the data from some of our investee companies and this is what the picture looks like across 250,000 individuals in rural Tamil Nadu, Uttarakhand and Orissa.

gold1

gold2

 

gold3

While there has been much discussion about demand for gold in recent times, the data reveals that land holdings are a much bigger issue from a concentration perspective. So, why are rural households hoarding these assets instead of financial assets?

 

In the absence of financial assets like fixed deposits, stocks and pension plans at these locations, rural households are forced to look at physical assets that will give them old age security and inflation protection, among other objectives. Land as an asset has many dimensions. Several of our labourer customers tell us that it is difficult to find wage labour opportunities beyond the age of 45 or so and then owning a piece of land becomes an important strategy to earn in the later years because you can always “hire yourself”. Similarly, in light of the heavy dependence on the local economy, gold is often the only “national asset” available to hedge against local economic downturns.

 

There is no quick-fix to alter asset allocations of rural households away from gold and land, despite their obvious shortcomings. We have to complete the task of making access to high-quality financial services available and create trust in these instruments and the institutions that provide them.

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shobana vasudevanshobana.vasudevan
Mr.Nachket Mor has a very valid point while mentioning land as a "real"pension asset.Given the changes in the rural geography where agricultural land is being converted into real estate and the rural folk is lured with one time settlement deprive them a regular income in the long run.Besides our food supply is sure to fall which will be a great blow to the population in the future if investment in agricultural land is curtailed.
Thanks for your comment Ms. Vasudevan. The conversion of agri land into commercial real estate is much more a semi-urban phenomenon. In remote villages, land is rarely if ever traded and is a pretty illiquid asset for households.
I feel though the irrationality story on Real Estate will change quite a bit if the Human Capital of the household is taken into account. Since there is likely to be a strong correlation between these two assets it may be the case that there is over-investment in real-estate and very strong under-investment in Gold or other national assets. Given the very strong regulatory impediments that are preventing financial inclusion from moving forward I would not be surprised if Gold continues to remain the financial asset of choice and if you, as their wealth managers, should not actually encourag them to buy more of this assets and make it easier for them do so. On the issue of land as a "real" pension asset I wonder though if the size of the land-holding is not far in excess of that is required and if, given the high proportion of younger people in household, using this kind of a precautionary motive is not actually a riskier strategy for the household relative to holding more Gold or other national assets. Would be eager to learn what your data reveals and what your thoughts on this issue are.
Nachiket, you are absolutely right that this picture does not include human capital of households (NPV of lifetime cashflows). If you include that, rural households are facing very high concentration risks in the local village economy. We think NPS and Index Funds are important from this perspective. Currently, we are not actively advising purchase of gold but your point is valid that it represents an easy to access national asset. We want to do more work to understand motives for land ownership and hope to write more about that in future.
Prasanna Srinivasan
Terrific research. All assets listed are of extreme relevance to the family context and local economy. Land and livestock also guarantee food security (grow and eat). These graphs don't cover it, but I suspect in say Uttarakhand, its a large component on non-monetized earnings. Gold has the advantage of portability (big asset for non-banked); ease of collateral for indigenous borrowings plus moves in value roughly with the dollar prices hedging against inflation. Bringing Gold into mainstream banking, (through gold banking) may well be an index of how successful the financial integration is happening.
Thanks for your comment Prasanna. Agreed that the assets are all relevant but as Nachiket mentions in his comments, the real concern is excessive concentration and what happens in bad times. In the unfortunate event of a landslide in Uttarakhand (which is not unusual), all "assets" held in the village erode in value (if not disappear) including wage rates in the local area. In our work, we emphasise that households must specialise as far as their economic activity is concerned, be it agriculture or livestock rearing or retail trade. However, their asset portfolio must be sufficiently diversified.
Prasanna Srinivasan
Thanks for the response (and the informed comments on the column for all). Just one point I'd like to add that may occur in the rural settings, especially the more distant from urban concentrations. Specialization of economic activity is hugely hindered by the existence and size of the market. Quantities vis-a-vis transport costs plus the ability to access main markets is an issue, even for the arthiyas. Of course, the scale can be built up over time - but in the interim its often difficult to expect a family to abandon multiple activities. The big glitch in gold banking, I suspect, is that available stock for trade will go up plus demand for new stocks will drop - both will affect prices (not fundamentally different from why central banks the world over aren't selling their gold!). Given the scale of gold holding in India in private hands, too many have stakes in propping up the price!
No wonder real estate and pawn broking biz flourish in these states.
 
 
Bindu Ananth
One of my favourite movie scenes is from “It’s a wonderful life”. The hero, George Bailey, is a reluctant banker. On his wedding night he has to deal with a bank run. In trying to stop the bank run, he tries to explain the concept of illiquidity to his depositors. "

"You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can."

George's vision of banking is infectious: it is not about pieces of paper or ledgers. It is about helping people build houses and dreams. This vision drives me. Along with my awesome team at IFMR Trust (where I am the president), am obsessed with seeing that all of India has access to high quality financial services; be it a daily wage labourer seeking to protect her Rs. 100 wage from inflation or a municipality issuing its bonds to build sanitation for its residents. I believe that finance, when done well, can be a tremendous force for good.

I live and blog from Chennai (and planes) but most of my stories are from Thanjavur, Ganjam and Uttrakhand.
 
 
 
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April 11, 2013 14:54 pm by Prasanna Srinivasan
Thanks for the response (and the informed comments on the column for all). Just one point I'd like to add that may occur in the rural settings, especially the more distant from urban concentrations. Specialization of economic activity is hugely hindered by the existence and size of the market. Qu...
April 11, 2013 02:49 am by Bindu Ananth
Thanks for your comment Prasanna. Agreed that the assets are all relevant but as Nachiket mentions in his comments, the real concern is excessive concentration and what happens in bad times. In the unfortunate event of a landslide in Uttarakhand (which is not unusual), all "assets" held in the villa...
April 11, 2013 02:42 am by Bindu Ananth
Thanks for your comment Ms. Vasudevan. The conversion of agri land into commercial real estate is much more a semi-urban phenomenon. In remote villages, land is rarely if ever traded and is a pretty illiquid asset for households.
April 11, 2013 02:37 am by Bindu Ananth
Nachiket, you are absolutely right that this picture does not include human capital of households (NPV of lifetime cashflows). If you include that, rural households are facing very high concentration risks in the local village economy. We think NPS and Index Funds are important from this perspective...
April 07, 2013 19:59 pm by shobana vasudevanshobana.vasudevan
Mr.Nachket Mor has a very valid point while mentioning land as a "real"pension asset.Given the changes in the rural geography where agricultural land is being converted into real estate and the rural folk is lured with one time settlement deprive them a regular income in the long run.Besides our fo...