Over the past few weeks, the world’s gaze has been on the U.S. elections. The 2020 presidential race has been one of the closest races to the White House in American history, competing with just a handful of other remarkably close U.S. elections since the beginning of the 19th century. As Joe Biden emerged victorious, and the Assembly elections in Bihar came to a close, we thought it would be a good time to shed some light on the personal finance situation in India vs. the U.S.
Whether you’ve lived in the U.S. or not, have friends and relatives there or not, it’s probable you might have come across some of these terms in the past. Understanding what they mean, and how they relate to us in the Indian context can be quite intriguing. So, here’s a comparison of some of the most relevant financial products and services, and a general approach towards money matters, in both countries.
Aadhar vs. Social Security Number
Aadhar, as we all know, is a twelve-digit unique identity card issued by the Indian government. Introduced in 2010, it is accepted by all government and non-government organisations as a proof of identity. It is a mandatory requirement for filing income tax returns. It’s also needed for a phone connection, to open a bank account, to get a gas connection, and to invest in mutual funds. The utility and benefits of Aadhar are only increasing with time.
A Social Security Number (SSN) is a nine-digit number that the U.S. government issues to all U.S. citizens as well as eligible U.S. residents who apply for one. The government uses this number to keep track of one’s lifetime earnings and the number of years worked. It is required while applying for a job, for a passport, a driver’s license, filing tax returns, and opening a bank account. Basically everywhere.
Speaking of Savings Bank Accounts
In India, the majority of the adult population has a savings bank account. With financial inclusion schemes like Jan Dhan accounts, the number of rural Indians participating in the banking sector has gone up over the years.
In the U.S., nearly 95% of households have a bank account. There are both brick and mortar banks, as well as online banks. The internet-only banks are just as evolved as traditional banks. On top of that, they provide slightly higher interest rates due to a lack of overheads.
India doesn’t have any online-only banks, since the concept of internet banking has been gaining popularity only recently, with the WhatsApp payments rollout being the most recent development in the digital payments space.
Retirement Savings Schemes
When it comes to saving for retirement, we have investment avenues like the Provident Fund, Public Provident Fund, and the National Pension Scheme (NPS). NPS is rapidly evolving as one of the best avenues for retirement, offering greater flexibility with investment style. One can increase or decrease exposure to equity, as well as reap the tax benefits that NPS provides. Similarly, having a Provident Fund account is common amongst salaried folks across the country. Every employer having more than 20 employees, opens an EPF account (Employee Provident Fund) for them, and contributes to the account, ensuring future savings is built up. For non-salaried folks, the Public Provident Account is the saviour.
In the U.S., there’s the 401(k) Plan and the Roth IRA (Individual Retirement Account). The 401(k) is an employer-sponsored retirement account, while the Roth IRA can be opened by individuals. The flexibility and tax benefits are numerous. And depending on the risk appetite of an individual, one can select from a wide range of investment choices while investing in an IRA.
Mutual Funds
The U.S. has a very large mutual fund market. To put it in perspective, the biggest mutual fund company in the U.S., Blackrock, handles $7 trillion in total funds managed (aka Assets Under Management, or AUM), which is almost 20 times the total funds of the entire mutual fund industry in India (INR 26 lakh crore).
The mutual fund market in India is at a nascent stage, with only ~2% Indians investing in it. Although one of the safest investment avenues, Indians are still averse to it. Could it be due to the slow-paced disclaimer during advertisements? Highly possible, I’d say.
Income Tax
Both India and the U.S. have adopted a progressive tax system. This means that low-income individuals are charged a lower tax rate, while high-income individuals are taxed at higher rates.
The difference in the two systems arises when it comes to the tax slabs, and how an individual files her return. The tax slabs in India differ based on the age of an individual. Lower rate for senior citizens and super senior citizens. Whereas in the U.S., the tax brackets are split based on the marital status. So, a married couple can combine their incomes and file a joint return. Interesting, isn’t it?
Loans
The debt market is again quite forward in the western world. Nearly every household has some debt instruments – be it a credit card, a student loan, or a housing loan. This is not the case in India.
There are only 3 credit cards per 100 people in India, as compared to 32 credit cards per 100 people in the U.S.. Similarly, the quantum of education loans and home loans unpaid and outstanding are also quite low in India when compared to the U.S.
The Good and the Not So Good
From all the above comparisons, it’s quite clear that the financial markets in the U.S. are a lot more developed and mature than the markets in India. Right from the variety of products, to the number of mature investors participating in the stock market, the U.S. is quite advanced.
Another aspect that contributes to the success of the personal finance situation in the U.S. is the fact that unbiased professional financial advisory services outweigh the biased commission-based financial services. This is something India still needs to work towards. Countries like ours look up to the U.S., and are growing with time. And while there certainly are many things to learn from the West, my hope is that we don’t ape the idea of consumerism.
Consumerism is rampant in the West, with credit card debt having crossed $1 trillion. Not surprisingly, the urban Indian picture today, looks almost the same. The outstanding credit card debt is almost ₹95,000 crores here!
On the brighter side, when it comes to savings, a vast majority of Indians do have a savings mindset. As per a recent Mint Survey, 55% of working Indians save towards retirement regularly. On the other hand, a 2019 CNBC survey states that only 10% of Americans are confident that they’ll have enough for retirement. Now that’s startling. In spite of having some of the best retirement plans, not many Americans seem to be utilizing them optimally.
The Dream
India is largely a middle-class country. We are usually averse to taking loans, and always trying to save the change. This savings mindset however, is diminishing amongst younger folks in the working world. If we continue to go down the consumerism road, this picture may well be different in the years to come. But what if we stop in our tracks, and make a change today? It would not only work in our favour, but also in favour of those who come after us. Our future generations will not inherit debt from us, they’ll inherit wealth. And better yet, we’d be able to contribute towards the betterment of society. Now, isn’t that the American global dream?
