Financial decisions may be made by individual persons, yet they are not for the sake of those decision makers alone. Let me offer a few examples.
It is quite a common practice for middle-class households in India to hire household help and then to financially support the long-term goals of that person — especially their children’s education — and to financially safeguard that person from untoward large expenses, such as an unexpected medical surgery in their household.
This kind of support is seldom deducted from the monthly pay of the household help. It is accepted as a routine responsibility, as part of the “contract” between the household and the help. Notice that this kind of social contract has implications for the financial decisions for both the household of the person being assisted, and the household employing that person.
It is also quite a common practice for most households in India — middle class or otherwise — to take care of their aged and elderly. Indeed, in India, for many decades now, the decision to bear multiple children is often thought to reflect the parents’ need for insuring themselves against the possibility that there will be nobody to take care of them when they grow old.
If one wonders whether this is not merely an urban myth, one only needs to look at the Chinese experience of instituting a one-child policy in 1978. Savings rates immediately began to rise within Chinese households and have continued to be much higher than the rest of Asia pretty much ever since.
By comparison, in India, the idea of “retirement assets” encompasses much more than merely financial instruments. This has implications both for how the individual members of a household relate to one another, and for the wider financial markets in retirement assets.
Or consider that, not only in India but all around the world, financial inter-dependencies within a household are sometimes the glue that holds a household together and at other times the forces that sunder it apart. A child is financially dependent on their parents but may exit the household when they become financially independent. Similarly, the emotional bond between a husband and a wife is as much rooted in the financial inter-dependency that connects them, as it is in pure feeling.
Furthermore, it is not uncommon to see people with good credit records borrowing not for their own selves or even their own households but for the sake of others, sometimes in other households, who do not have a credit history or may have a bad credit record. Especially in the latter instance, why would a person with a good credit record be willing to take on such a burden? It is because there must be some emotional connection between the two households that makes this a worthwhile responsibility to shoulder.
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The social dimension of finance
From the very first, the individual person’s financial decision has, therefore, a social dimension. Recognising this social dimension is very important because it alerts us to the existence of ongoing relations between different members of the household and between one household and another in a community. These relations are critical for not only the financial decisions that the head of the household makes, but also for financial markets and the economy at large. If Indian households were to suddenly start saving more of their income, that would surely spell doom for the economy.
Or if Indian households were to suddenly start investing in foreign assets, that would cause all sorts of havoc in India’s financial markets as well as in the relative value of the Indian rupee against foreign currencies. Yet these shifts of perspective or preference are not rooted in individual idiosyncrasies but rather in interactions of both cooperation and contention between members of households.
This is what household finance is all about. It is different from personal or retail finance insofar as it explicitly incorporates the social dimension of economic and financial decision-making. This social dimension is often missed by the popular commentary about finance, which prefers to see financial decisions as emerging from an individual for their own sake and to serve only their own selves.
A far richer narrative about finance and its role in our lives can emerge from recognising that this individual story is but part of a large drama that is unfolding, within households and across households, especially in a densely populated, complex, interconnected, interdependent society such as India’s.
Dr Indradeep Ghosh is the Executive Director of Dvara Research.
The article is part of our series of financial explainers in partnership with Dvara Research.
Views are personal.
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