LIFE INSURANCE
Karo Zyaada K a Iraada
©The Max New York Life Insurance Limited, 2007
             ©The National Council of Applied Economic Research, 2007




 ...
STUDY TEAM



                            Team Leader and Principal Author
                                      Dr Rajesh...
FOREWORD



The Indian economy is growing from strength to strength. The fast-paced economic growth is bringing about a
ch...
PREFACE



In 2006-07, the National Council of Applied Economic Research (NCAER) celebrated its Golden Jubilee. Over the
l...
ACKNOWLEDGEMENTS



The National Council of Applied Economic Research (NCAER) extends its appreciation to Max New York Lif...
TABLE OF CONTENTS



                                                                        Page No.
             List of...
TABLE OF CONTENTS




Chapter 4                 How India Saves                                             43
        4.1...
LIST OF TABLES



Table No.      Title                                                               Page No.
Chapter 1   ...
LIST OF FIGURES



    Figure No.      Title                                                                              ...
LIST OF FIGURES



Figure No.     Title                                                                          Page No.
...
LIST OF FIGURES



    Figure No.      Title                                                                           Pag...
EXECUTIVE SUMMARY



The Indian economy has been growing at a healthy                  To increase accuracy and ensure ade...
Incomes of Indian households are a function of factors           in the lowest income quintile (Q1) are residing in the lo...
Like earnings, expenditure patterns too are a function       unable to meet their needs through the financial
of age, occu...
saving specifically for this reason versus 60 per cent of    of optimists when it comes to financial security. More
    ur...
country is Rs 27,951, the average premium paid is           important product among all insurance products such
Rs 1,227 a...
An indicator of the kind of financial planning most      insurance even at the existing levels of income, given
     house...
CHAPTER 1
                                              INTRODUCTION



1.1 Background                                    ...
1.2 About the survey                                                     To increase accuracy and ensure adequate item
   ...
unique as no comparable data exists for the country         Chapter 3 presents a similar analysis of the households’
prior...
RELIABILITY OF ESTIMATES
       Surveys often tend to bring to fore certain stark
       trends and statistics. And invari...
of the smaller states and union territories which           One of the major objectives of this study was to
account for a...
field team was thoroughly trained through all the     procedure to correct data at the household
      phases of the surve...
CHAPTER 2
                                                    HOW INDIA EARNS




                     The large differenc...
2.1 INCOME-EXPENDITURE PROFILE                                               areas versus Rs 40,309 per annum in rural one...
Figure 2.4:
                                                            Share of population and income by
                ...
income levels, and this is even more true for urban                                               2.3 INCOME BY AGE-GROUP
...
per annum for households where the chief earner is            rural area earns almost double (Rs 99,243 per annum)
above 6...
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
Mnyl Ncaer Book   How India Earns, Spends And Saves
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Mnyl Ncaer Book How India Earns, Spends And Saves

  1. 1. LIFE INSURANCE Karo Zyaada K a Iraada
  2. 2. ©The Max New York Life Insurance Limited, 2007 ©The National Council of Applied Economic Research, 2007 ISBN: 81-88830-10-0 All rights reserved, no part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise, without the prior written permission of the publisher. Published by Debasis Sarkar, Director – Marketing, Products & Corporate Communication for and on behalf of The Max New York Life Insurance Limited For further Information please contact: abhinav.rahul@maxnewyorklife.com rkshukla@ncaer.org Printed at The Creative Edge 188, IInd Floor Patparganj Industrial Area, Delhi-92, preet.creative@gmail.com India Financial Protection Survey
  3. 3. STUDY TEAM Team Leader and Principal Author Dr Rajesh Shukla Senior Fellow, NCAER NCAER Core Research Team Ms Nitasha Monga Ms Asha Sharma Mr Sandipan Ray Dr Sanjay Kumar Dwivedi Ms Charu Jain Ms Preeti Kakar Mr Anuj Das Mr Debraj Sinha Mr M. K Arora Mr Subrata Bandopadhyay NCAER Consultants Dr N S Sastry, Former DG (NSSO and CSO) and Senior Advisor, NCAER, New Delhi Dr Anil Rai, Senior Scientist, IASRI, New Delhi Dr Amaresh Dubey, Senior Advisor, NCAER, New Delhi Ms Adite Chatterjee, Research & Communication Analyst, New Delhi Members of Advisory Committee Mr Suman Bery, Director General, NCAER, New Delhi - Chairman Mr S L Rao, Chairman, Institute for Social and Economic Change, Bangalore Dr D V S Sastry, Director General, Insurance Regulatory and Development Authority, Hyderabad Dr Subhasis Gangopadhyay, Director, Indian Development Foundation, Gurgaon Members of Max New York Life Mr Debashis Sarkar, Director-Marketing, Product Management & Corporate Affairs Mr. Abhinav Rahul, Vice President, Corporate Communications India Financial Protection Survey
  4. 4. FOREWORD The Indian economy is growing from strength to strength. The fast-paced economic growth is bringing about a change in India’s socio-economic fabric. It is creating more jobs, fuelling aspirations and leading consumers to spend more. It is not uncommon to see Indian households spend beyond their current earning capacities, a phenomenon that was almost non-existent in the early 1990s. Easy availability of loans, increasing popularity of credit cards and rising consumerism are putting an increasing number of Indian households under the risk of being financially vulnerable in the future. The lack of a comprehensive government-aided social security system only worsens their case. As a result of rapid urbanisation, rising consumerism and changing lifestyles, the social fabric of the country has also begun to change. The joint family system is fast giving way to nuclear families. Joint families, by their very nature, worked around the financial well being and security of each of its members. As this system crumbles, there is a greater need to work towards making Indian households more financially secure. All these socio-economic indicators were instrumental in leading Max New York Life to undertake this study, along with the NCAER. These indicators brought us to the critical question: ‘How financially protected are we?’ As you would be aware, this is the first survey of its kind in the country. The findings of this report reinforce the fact that a majority of Indian households are financially at risk. The call to action for the insurance sector is to address this issue and help create a financially secure nation. The first step towards this larger goal is to spread awareness about financial instruments, such as life insurance. We at Max New York Life believe that life insurance provides financial protection and long-term wealth creation. The customised solutions, which Max New York Life provides, are based on the financial needs of Indian families. We believe that by educating our customers we help them in making the right choices to meet their financial goals, both in the short term and the long term. The findings of this survey will help us in this endeavour. For Max New York Life, and other insurance companies in the country, the Max New York Life-NCAER India Financial Protection Survey is a goldmine of data and information that can help us devise better products for the Indian market. I hope that this survey proves to be the first step towards building a stronger and more financially secure India. Gary Bennett, Managing Director and CEO, Max New York Life Insurance Co. Ltd. India Financial Protection Survey
  5. 5. PREFACE In 2006-07, the National Council of Applied Economic Research (NCAER) celebrated its Golden Jubilee. Over the last few decades, NCAER has complemented the work of other official agencies in gathering statistical data on household income, savings and consumption. And in its 50th year, I am particularly happy that NCAER has partnered with Max New York Life to bring out this eye-opening study on financial protection in India. Our partnership with Max New York Life has helped us gather and develop valid data on attitudes and practices that have a bearing on the financial security of Indian households. The survey is comprehensive – with a sample size of over 63,000 households spread across the length and breadth of the country. In India, where social security is virtually non-existent, there is an urgent need to create awareness about financial protection, amongst both the masses and the classes. While governments have a role to play for the poor households (such as the public distribution system targeted at below the poverty line or BPL households), in general financial security largely remains the responsibility of each household. The findings of the Max New York Life-NCAER India Financial Protection Survey reveal a need to spread awareness about financial protection in the country. Our data broadly confirms the fact that Indian households are in the habit of saving out of household income, and also that they are largely optimistic about their financial security in the future. Yet, for almost a quarter of households across the income spectrum, their current income is insufficient to meet routine and non-routine expenditure. This creates the need for a reserve of financial assets for them to fall back upon. At the same time, their awareness of strategic financial planning is relatively primitive. Through this survey, we have also been able to gather ample data on the much-talked about rural-urban divide. The survey brings to fore stark disparities in the earning, saving and spending patterns of rural and urban India. These statistics can be used by policy-makers and industry to address the vital issue of a more balanced economic development. As per the findings of this survey, awareness about life insurance is fairly high amongst Indian households – rich or poor. Despite this, ownership of life insurance is low. And even amongst households that possess life insurance policies, the cover is inadequate. Therefore, the market potential for insurance companies like Max New York Life is tremendous. This survey has also been able to confirm that life insurance ownership is a function of education and affluence. And that ownership of life insurance products is largely an urban phenomenon. As India continues to grow, the need for financial security will only increase. We trust that this survey will assist both the government and industry to develop more focused campaigns to achieve this important goal. Suman Bery, Director General, NCAER India Financial Protection Survey
  6. 6. ACKNOWLEDGEMENTS The National Council of Applied Economic Research (NCAER) extends its appreciation to Max New York Life for entrusting NCAER to undertake the India Financial Protection Survey. The Advisory Committee — chaired by Mr. Suman Bery and consisting of members Mr S L Rao, Chairman, Institute for Social and Economic Change, Bangalore; Dr D V S Sastry, Director General, Insurance Regulatory and Development Authority, Hyderabad and Dr Subhasis Gangopadhyay — extended its guidance and support throughout the study. We acknowledge the committee's generous contribution of time, effort and expertise under the most stringent of schedules. Several researchers and policymakers helped NCAER's research team in its efforts to undertake this study. We extend our appreciation and gratitude to NCAER Advisors and Consultants Dr N S Sastry, Former DG (NSSO and CSO) and Senior Advisor—NCAER, Dr Amaresh Dubey, Senior Advisor, NCAER, Dr Anil Rai, Senior Scientist, IASRI and Ms Adite Chatterjee, Research & Communication Analyst, for their useful technical inputs and guidance that enriched this study. The NCAER research team deserves a special mention, for all its efforts to go through reams of data and statistics in order to come out with incisive analysis. The NCAER field staff and State Networking Agencies and NCAER support staff worked overtime to collect data from all across the country. This study would not have been possible without their efforts. Max New York Life team particularly Debashis and Abhinav provided the NCAER team with the right support and inputs, which helped us come out with some stark findings in this report. We also acknowledge the efforts of Genesis Burson- Marsteller team in helping it get the right coverage in the national and regional media. India Financial Protection Survey
  7. 7. TABLE OF CONTENTS Page No. List of Tables 1 List of Figures 2 Executive Summary 5 Chapter 1 Introduction 11 1.1 Background 11 1.2 About the survey 12 1.3 Importance of the survey 12 1.4 Plan of the Report 13 Chapter 2 How India Earns 17 2.1 Income Expenditure Profile 18 2.2 Income by Occupation 18 2.3 Income by Age-group 20 2.4 Rural-Urban Divide 21 2.5 Impact of Education 21 2.6 Disparity by Categories of Landholding 23 2.7 Regional Disparity 24 2.8 Disparity by the Size of Town 25 2.9 Disparity in Select Cities 27 Chapter 3 How India Spends 31 3.1 Expenditure Pattern by Occupation 32 3.2 Expenditure Profile by Education Level 33 3.3 Expenditure Pattern by Categories of Landholding 35 3.4 Impact of Income 36 3.5 Regional Expenditure Profile 37 3.6 Expenditure Pattern by the Size of Town 38 3.7 Ownership of Consumer Durables 39 India Financial Protection Survey
  8. 8. TABLE OF CONTENTS Chapter 4 How India Saves 43 4.1 Savings Pattern of Indian Households 43 4.2 Why do Indians Save? 47 4.3 Preferred Mode of Saving 48 4.4 Savings Related Household Behaviour 50 4.5 Coping with Trauma 51 4.6 Households’ Perceptions About Financial Security 51 Chapter 5 Life Insurance 57 5.1 Awareness About Life Insurance 57 5.2 Ownership Pattern of Life Insurance 59 5.3 Value of Life Insurance and Premium Paid 60 5.4 Socio-Economic Profile of Insured Vs Uninsured Households 64 5.4.1 Demographic Profile 64 5.4.2 Economic Profile 65 5.4.3 Ownership of Select Consumer Durables 67 5.5 Savings Related Behaviour of Insured Households 67 5.5.1 Why do Insured Households Save? 67 5.5.2 Where do Insured Households Prefer to Save? 68 5.5.3 Ownership of Account in Financial Institution and 69 Outstanding Loan 5.5.4 Managing Economic Hardship 69 5.6 Insured Households’ Perception of Financial Security 69 5.6.1 Confidence in Stability of Source of Income 69 5.6.2 Time to Recover 70 5.6.3 Sustainability on Current Savings 70 Chapter 6 Way Forward 72 Annexure I Survey Methodology 79 India Financial Protection Survey
  9. 9. LIST OF TABLES Table No. Title Page No. Chapter 1 Introduction 1.1 Estimates of standard errors 15 Chapter 2 How India Earns 2.1 Estimates of households and population 17 2.2 Earnings by education level of chief earner 22 2.3 Household profile by size of landholding 23 2.4 Distribution of households by level of education of chief earner 23 and suze of land holding 2.5 Distribution of households by source of income 24 and size of land holding 2.6 Profile of households in different categories of states 24 2.7 Profile of households by size of town 25 2.8 Earnings by size of town and level of education of chief earner 26 2.9 Earnings by size of town and major source of income 26 2.10 Profile of households in select cities 28 2.11 Income distribution by per capita income quintiles 29 2.12 Estimates of income inequality 29 Chapter 3 How India Spends 3.1 Estimates of financial vulnerability 41 Chapter 4 How India Saves 4.1 Measures taken to overcome economic shock 51 Chapter 5 Life Insurance 5.1 Value of insurance by location 61 5.2 Value of insurance by major source of household income 61 5.3 Value of insurance by level of education of chief earner 62 5.4 Value of insurance by age of chief earner 62 5.5 Value of insurance by size of landholding 63 5.6 Value of insurance by level of income 63 India Financial Protection Survey 1
  10. 10. LIST OF FIGURES Figure No. Title Page No. Chapter 1 Introduction 1.1 Distribution of household by socio-religious groups 14 Chapter 2 How India Earns 2.1 Estimates of income and expenditure 18 2.2 Distribution of households by major source of household income 18 2.3 Share of population and income by occupation of chief earner – Urban 19 2.4 Share of population and income by occupation of chief earner – Rural 19 2.5 Share of population and income by occupation of chief earner – All India 19 2.6 Share of population and income by age of chief earner – Urban 20 2.7 Share of population and income by age of chief earner – Rural 20 2.8 Distribution of households and income by major source of household income 21 2.9 Earnings by level of education for salaried households – All India 22 2.10 Distribution of households by landholding 23 2.11 Distribution of households across state categories – All India 24 2.12 Distribution of households across income quintiles – All India 25 2.13 Earnings of graduate households in select cities 26 2.14 Earnings of salaried and business households in selected cities 27 2.15 Distribution of household by highest literacy 30 2.16 Distribution of household by major source of income 30 2.17 Ownership of selected consumer goods 30 Chapter 3 How India Spends 3.1 Estimates of routine and non-routine expenditure 31 3.2 Distribution of routine expenditure 32 3.3 Distribution of unusual expenditure 32 3.4 Estimates of routine and non-routine expenditure by major source of income 32 3.5 Distribution of routine expenditure by major source of income 33 3.6 Distribution of non-routine expenditure by major source of income 33 3.7 Estimates of routine and non-routine expenditure by education level of chief earner 34 3.8 Distribution of routine expenditure by education level of chief earner 34 3.9 Distribution of non-routine expenditure by education level of chief earner 34 3.10 Estimates of routine and unusual expenditure by landholding 35 2 India Financial Protection Survey
  11. 11. LIST OF FIGURES Figure No. Title Page No. 3.11 Distribution of routine expenditure by landholding 35 3.12 Distribution of non-routine expenditure by landholding 35 3.13 Estimates of routine and non-routine expenditure by income quintiles 36 3.14 Distribution of routine expenditure by income quintiles 36 3.15 Distribution of non-routine expenditure by income quintiles 37 3.16 Estimates of routine and non-routine expenditure by categories of states 37 3.17 Distribution of routine expenditure by categories of states 38 3.18 Distribution of non-routine expenditure by categories of states 38 3.19 Estimates of routine and non-routine expenditure by size of town 39 3.20 Distribution of routine expenditure by size of town 39 3.21 Distribution of non-routine expenditure by size of town 39 3.22 Ownership of consumer durable 40 3.23 Estimates of income and expenditure 41 3.24 Distribution of households – Vulnerable versus non-vulnerable 42 3.25 Ownership of selected consumer goods – Vulnerable versus non-vulnerable 42 Chapter 4 How India Saves 4.1 Estimates of surplus income, investment and savings 43 4.2 Estimates of surplus income, investment and savings 44 by occupation of chief earner 4.3 Saving habits of Indian households by education level of chief earner 44 4.4 Saving habits of households by age of chief earner 45 4.5 Saving habits of households by categories of landholding 46 4.6 Saving habits of households by categories of states 46 4.7 Saving habits of households by size of town 47 4.8 Motivation to save for future 47 4.9 Preferred forms of saving 48 4.10 Preferred forms of saving – banks versus keeping at home 49 4.11 Ownership of an account in financial institutions 50 4.12 Loan outstanding 50 4.13 Confidence in stability in household income 52 4.14 Time to recover in case of loss of income source 53 4.15 Sustainability on current savings 54 India Financial Protection Survey 3
  12. 12. LIST OF FIGURES Figure No. Title Page No. 4.16 Distribution of households by major source of income 56 4.17 Distribution of households by level of education of chief earner 57 4.18 Estimates of income, expenditure and surplus income 58 4.19 Size of investment 59 Chapter 5 Life Insurance 5.1 Awareness about life insurance 60 5.2 Awareness about life insurance across income levels - rural versus urban 60 5.3 Ownership of life insurance 61 5.4 Ownership of life insurance across income quintiles - rural versus urban 62 5.5 Major source of household income of insured versus uninsured 63 5.6 Education level - insured versus uninsured 64 5.7 Age profile - insured versus uninsured 66 5.8 Marital status - insured versus uninsured 67 5.9 Gender - insured versus uninsured 67 5.10 Estimates of income, expenditure and surplus income - 67 insured versus uninsured households 5.11 Estimates of routine and non-routine expenditure - 68 insured versus uninsured households 5.12 Distribution of routine expenditure - insured versus uninsured households 68 5.13 Distribution of non-routine expenditure - insured versus uninsured households 68 5.14 Saving habits - insured versus uninsured households 68 5.15 Investment profile - insured versus uninsured 69 5.16 Ownership of select consumer durable goods - 69 insured versus uninsured households 5.17 Motivation to save - insured versus uninsured households 70 5.18 Preferred form of saving - insured versus uninsured households 70 5.19 Account in financial institution and loan outstanding 70 5.20 Measures taken to overcome death of chief earner 71 5.21 Measures taken to overcome major sickness of any household member 71 5.22 Confidence about the stability in major income source 71 5.23 Time to recover in case of loss of income source 72 5.24 Sustainability on current savings 72 4 India Financial Protection Survey
  13. 13. EXECUTIVE SUMMARY The Indian economy has been growing at a healthy To increase accuracy and ensure adequate item rate of over 8 per cent for the last four financial years. response, the survey was conducted by holding face- But has the economic growth rate made Indians more to-face interviews of heads, as well as members, of financially secure? Are Indian households now earning, these sampled households with the help of a spending and saving more? And do they undertake questionnaire. Non-response and non-sampling error financial planning of any kind to secure their future? were reduced by conducting focused group The Max New York Life-NCAER India Financial discussions, proper training of interviewers and Protection Survey was initiated to seek answers to supervision. these very vital questions. Some of the important indicators and estimates in this A financially secure country cannot be built on the study are fairly comparable with those of other reliable base of a small population of financially secure data sources such as NSS 61st Round, Census 2001 and households. If we, as individuals, are financially well- National Accounts sources. Above all, a group of protected, our nation will emerge stronger financially. eminent economists and statisticians were associated Max New York Life, one of India’s leading life insurance as members of the Advisory Committee and as companies, and the country’s reputed policy research advisors throughout the study and the findings of the organisation, the National Council of Applied Economic study have been endorsed by them. Research (NCAER), got together to undertake an all- India household survey to determine the financial Some of the key (chapter-wise) findings are as follows: security and well-being of Indian households and to generate a risk profile of Indians across socio- How India Earns economic groups. By definition, financial risk is There were 205.9 million households in the country in essentially an assessment of earnings, spending and 2004-05, of which 30 per cent (61.4 million) lived in saving patterns of households and the financial urban areas and the rest (144.5 million) in rural areas. products they invest in order to protect themselves The average household in India has an annual income against financial risks. of Rs 65,041 and an expenditure of Rs 48,902, leaving it with a surplus of Rs 16,139 to save and invest. Given the absence of a robust, state-supported social security programme in India, one of the objectives of Urban income levels are around 85 per cent higher the study was to understand the significance and than rural ones (Rs 95,827 per annum versus Rs potential of life insurance as a 51,922 per annum). Given the fact that expenses of risk-mitigating tool for Indian households. urban households are also substantially higher (at Rs A probability sample comprising of 63,016 households, 69,065 per annum) than rural ones (Rs 40,309 per out of a preliminary listed sample of 440,000 annum), an average urban household saves nearly households, spread over 1,976 villages (250 districts) double that of a rural household (Rs 26,762 per and 2,255 urban wards (342 towns) covering 64 NSS annum in urban areas versus Rs 11,613 for rural regions in 24 states/UTs was interviewed while areas). executing the survey. India Financial Protection Survey 5
  14. 14. Incomes of Indian households are a function of factors in the lowest income quintile (Q1) are residing in the low- like occupation, education and landholdings. For income states; 20.8 per cent in middle-income and just instance, in rural areas, households headed by 12.3 per cent in high-income states. labourers account for 34.6 per cent of the rural households, but only 20.2 per cent of rural income; in Labourers constitute the largest segment of poor urban areas, the corresponding figures are 22.9 per households and comprise over 62 per cent of such cent and 9.7 per cent respectively. At the all-India households. In contrast, this group accounts for 26 per level, the labour class has the largest difference cent of the non-poor households. Those earning between the share of such households in the total salaries account for 21.7 per cent of non-poor population (31.2 per cent) and the share in total households whereas just about 4.4 per cent of poor income (15.6 per cent). households earn their living through salary/wages. Incomes tend to increase with age. At the all-India level, How India Spends average household incomes rise from Rs 47,192 per Apart from the large differences in urban and rural annum in the case of households where the chief income, there is a big difference in the manner in earner is below 25 years old to Rs 55,663 in the 26-35 which income is spent. The average Indian household year age group, to Rs 85,841 per annum for households spends about three-fourth of its income on routine where the chief earner is above 66 years old. and non-routine expenditure. Not surprisingly, education makes a big difference to The rural-urban divide is also evident in the spending earning levels. Salary levels range from Rs 37,574 per patterns of households. While rural households spend annum for illiterate households to Rs 131,104 (that is, (on an average) Rs 18,404 on food items in a year, 3.5 times that of lowest level) for graduate urban households’ spend level on food items is households. For each level of education, salary levels in Rs 26,858. As a proportion of income, urban urban areas are higher as compared to rural areas. households spend around 45 per cent of their income on food while rural ones spend around 55 per cent. Similarly, the land possessed also determines earning levels. For instance, households that do not own any Not surprisingly, expenses on items like food tend to cultivable land form 37.3 per cent of the population, drop (as a share of both income and expenses) as but their share in rural income is 30.7 per cent. In households get richer. Food expenses, which comprise contrast, large farmers account for just 4.7 per cent of 51.1 per cent of all routine expenditure at the all-India the rural population and they contribute about 9 per level, rise to 59 per cent in the case of households cent to rural income. headed by illiterates. This falls to 43 per cent in the case of households headed by graduates. India also has large regional disparities in income. In Delhi, which is the richest state in the country, the average per Similarly, there a large difference in the proportions capita income per annum is Rs 29,137. In comparison, spent on housing (5.9 per cent in urban areas versus the average per capita income per annum in the case of 3.8 per cent in rural areas) and on education (8.7 per Bihar, India’s poorest state, is only Rs 6,277. If the various cent versus 6.4 per cent). But expenses in other areas states are bunched into three categories of low, middle like health (4.7 per cent versus 4.6 per cent), clothing and high income (based on the level of their per capita (7.1 versus 6.8 per cent) and buying durables (4.9 income), you will find that nearly 67 per cent households versus 5 per cent) are not too dissimilar. 6 India Financial Protection Survey
  15. 15. Like earnings, expenditure patterns too are a function unable to meet their needs through the financial of age, occupation, education, landholdings and resources at their disposal. Approximately three-fourth location. Households whose main source of income is of such households is located in rural India. salaries/wages have the highest annual income as well as the highest annual consumption expenditure. They How India Saves spend more on non-food items (Rs 33,560 or 55 per Due to the lack of a social security system, over 80 per cent) than on food items (Rs 27,975 or 45 per cent). cent of Indians save. However, less than a fourth of these savings finds its way into financial instruments . Weddings, social ceremonies and medical expenses While two thirds of all savings are kept in the form of largely make up for the unusual expenditure of liquid assets – in cash, in the bank and in post office households. While unusual expenditures account for deposits – around a fifth of all investments are in the around 13.6 per cent of income in rural areas, the form of premium on insurance policies, as compared figure is marginally lower at 10.6 per cent in urban to just 7 per cent in the case of shares/debentures. areas. For the country as a whole, it is 12.2 per cent. As with earnings and spends, savings patterns too are Not surprisingly, the urban-rural disparity is also a function of factors like age, education, location and reflected in the ownership profile of most consumer landholdings. The survey found the salaried to be the durables. For instance, in the lower category of biggest savers. Salaried employees comprise just 18 durables like pressure cookers and ceiling fans, urban per cent of households in the country, but they have ownership levels are much higher than those for rural the highest levels of income (Rs 108,620 per annum) areas. Just 38 per cent of rural households, for instance, and the highest levels of savings from it (33 per cent). own a pressure cooker/pan as compared with 80.4 per cent for urban areas. Among the medium category of Indian households have different reasons for keeping consumer durables (such as black-and-white TV sets, some money as savings – ranging from emergencies geysers, vacuum cleaners and mixer-grinders), to marriages and social events, children’s education penetration levels are even lower -- just 35 per cent of and gifting. Saving for emergencies emerges as the all households in India have mixer-grinders, with more top-most priority for Indian households with 83 per urban homes (56 per cent) compared to rural homes cent households saving for this purpose. Children’s (19 per cent) owning these gadgets. education is another key priority – almost 81 per cent households save for this need. Ownership of high-end consumer products is even Nearly 69 per cent households in India save for reasons limited. However, for certain products, the share is of old age financial security whereas 63 per cent growing. Regular colour TVs, for instance, have households save to meet future expenses towards penetrated a third of Indian homes, with ownership marriages, births and other social ceremonies. Nearly being significantly higher in urban households - at 47 per cent households save to buy or build a house 54 per cent. and a similar percentage is saving to improve or enlarge their business. The survey found one-fourth of Indian families (51 million households equivalent to about 262 million Weddings, births, social events and ceremonies have persons) to be financially vulnerable. In other words, a special place in the lives of Indian families. Not incomes of around 25 per cent of Indian households are surprisingly, 63 per cent of households save for social below their total expenditure and these households are ceremonies with 64 per cent of rural households India Financial Protection Survey 7
  16. 16. saving specifically for this reason versus 60 per cent of of optimists when it comes to financial security. More urban households. The percentage of households than half the Indian households (54 per cent) are saving to buy a house is slightly higher in urban India confident about their current and future stability. (51 per cent) compared to rural India (45 per cent). Unfortunately, the survey highlights that this financial A key finding of the survey was the fact that 36 per optimism is not based on facts. An overwhelming 96 cent of households in the country prefer to keep their per cent of households feel that they cannot survive savings at home. More than half of Indian households for more than one year on their current savings in case (51 per cent) prefer to save by keeping their savings in they lose their major source of household income and bank deposits. Households opting for post-office yet 54 per cent households feel that they are deposits account for just 5 per cent. Cooperative financially secure. Financially at risk urban Indians society deposits, chit funds, bonds are some of the appear to be even more optimistic than their rural other modes of saving. Only 2 per cent households opt counterparts. This clearly indicates that Indians do not for purchasing insurance policies. take a long-term view of their financial security and hence their optimism is misplaced and there is a Households in the lower income quintiles and more so pressing need for financial literacy for better in rural areas, have the highest tendency to save their understanding of their financial risks. money in the form of cash. So, 58 per cent households in the bottom-most income quintile (Q1) keep their At the all-India level, investment in financial savings at home in the form of cash (30.5 per cent put instruments – such as small savings, stocks and it in the bank and another 5 per cent in post office insurance – accounts for about 3 per cent of the accounts) and this falls to 20.3 per cent in the case of estimated household income. Of these, investment in the top-most income quintile (and rises to 68.1 per stock market and small savings account for 0.5 per cent households putting their money in banks and cent each but for life insurance, the corresponding around 3.0 per cent in the post office). figure is higher - at around 2 per cent. If we consider the sub-set of households that invest in these financial When hardships fall on Indian households (such as the instruments, the proportion of such investments to death of the chief earner, or a major illness in the their household income is significantly higher. For family), most households draw down on personal instance, investors in the stock market invest about 22 savings. The urban-rural split: 58 per cent urban per cent of their household income compared to 14 households and 54 per cent rural households took per cent in the case of small savings and 4 per cent for recourse to personal savings in the event of a financial life insurance. hardship. Almost a fourth of all Indian households opted for a loan from a friend or a relative to tide over Life Insurance the financial crunch. Awareness about insurance is quite high in India. Around 78 per cent households are aware of insurance The main reason why Indians tend to save for products. Despite this, ownership of insurance emergencies (and not for their old age) is the fact that, products is low - only 24 per cent households in the by and large, they are quite confident of their ability to country own a life insurance cover. live off their savings after retirement, and to be able to find another job within months of losing the current At the all-India level, for all households, while the one. The study clearly brings out that India is a country average sum assured of a life insurance policy in the 8 India Financial Protection Survey
  17. 17. country is Rs 27,951, the average premium paid is important product among all insurance products such Rs 1,227 and this represents 4 per cent of the as health (6 per cent), crop (3 per cent) and household disposable income. If, however, the insured automobile (5 per cent) insurance. households alone are considered, their average premium payments work out to Rs 5,007, with the Like awareness, ownership of life insurance products sum assured of Rs 114,450. too is a function of factors like education, age, landholdings and income. Households that buy life Urban India is more aware of life insurance – 90 per cent insurance tend to be more prosperous, more educated, of urban households are aware of life insurance, as and own more consumer durables than those that don’t opposed to 73 per cent rural households. Life insurance buy insurance. For instance, nearly 58 per cent awareness is also a function factors like occupation, households with chief earners who are graduates (or age, education and size of the landholdings. The salaried more educated than that) own life insurance against class is most aware about insurance. Nearly 95 per cent just 13 per cent and 9 per cent in the case of primary- salaried households are aware about insurance educated and illiterate households. And 26 per cent of compared to 89 per cent households that are engaged households that have chief earners who have studied in non-agricultural self-employed work followed by up to the higher secondary level are insured. agricultural households (77 per cent) and labour households (63 per cent). The ratio of premium payments to income indicates that the insured household is currently utilising about Awareness about life insurance increases with age. 4.4 per cent of disposable income towards insurance Households with chief earners in age groups of 46-55 payment as against about 1.9 per cent of income for years, 56-65 years and 65+ years are more aware (81 the entire household sector. The average sum assured per cent each) about insurance than the younger age of policies in urban insured households is higher - at groups. Similarly, households that have larger Rs 132,249 - with a premium of Rs 6,634 compared to landholdings are more aware of insurance than those Rs 98,899 with premium of Rs 3,560 for their rural with relatively smaller landholdings or the landless: counterparts. only 66 per cent of households among the landless and 72 per cent among marginal farmers (0.1-2 acres) are Of the insured population, an overwhelming majority – aware of insurance. Percentages rise to 86 per cent and 86 per cent – comprises of males. Only 14 per cent of 87 per cent among farmers with medium (4-10 acres of the insured are females. A similar analysis of the land) and large (10-plus acres) landholding respectively. uninsured population reveals that nearly 52 per cent of the uninsured are males and 48 per cent are females. Awareness of insurance is largely linked to income levels. Nearly 90 per cent of the top income quintile The main reason why insured households save for group (Q5) and 81 per cent in the 60-80 per cent emergencies and not for their old age is the fact that, income quintile group (Q4) in rural India are aware of by and large, they feel quite secure about their ability insurance products. to live off their savings after retirement, and to be able to find another job within months of losing the current To an average Indian, life insurance is the most one. At the all-India level, 23.2 per cent of insured important form of insurance. At the all-India level, households said they were very confident about the about 86 per cent of households aware about the stability of their household income, and another 51 per insurance considered life insurance as the most cent said they were confident. India Financial Protection Survey 9
  18. 18. An indicator of the kind of financial planning most insurance even at the existing levels of income, given households undertake is the time they believe it will its distribution and the employment structure. For take to recover from a loss of income compared to instance, there are 11 million rural and 10 million their level of confidence about the stability of their urban households that could be a lucrative target for incomes. So, 35 per cent of insured households believe life insurance marketers. These segments are aware of it will take them less than six months to be able to life insurance and are confident about their financial replace their current incomes in case of a disruption. security, but are not insured. They earn more than the More uninsured households are unsure of the time median income of the insured households. In frame by which they would be able to find alternative monetary terms, taking the current premium amount income (38 per cent) compared to insured households of Rs 5,007 per household into account, the immediate (30 per cent). More insured households claim they market opportunity for life insurance works out to would be able to find alternative income (26 per cent) around Rs 105 billion. This humungous opportunity can within a year, compared to those who do not own be captured by insurance industry players through insurance (19 per cent). their existing marketing strategies. The study clearly indicates that there is a definite scope for increasing the volume of savings in life 10 India Financial Protection Survey
  19. 19. CHAPTER 1 INTRODUCTION 1.1 Background most life insurance policies are regarded as a tax-saving Financial risk management is a new conceptual tool or even a pure investment. Only a minuscule framework that views financial protection as a set of percentage of the population, particularly salary earners measures that support individuals and households to and businessmen, own life insurance. There is a large manage financial risks. It includes three strategies to segment of people – including businessmen, deal with risk (prevention, mitigation and coping), professionals, farmers, artisans and others – who remain three levels of formality of risk management (informal, “financially unprotected” and outside the purview of any market-based and public) and many actors (individuals, form of financial protection. Even those who own life households, communities, NGOs, governments at insurance policies are generally under-protected. various levels and international organizations) against the background of asymmetric information and In the backdrop of these harsh realities, how financially different types of risk. This view of social protection secure are Indians? How many Indians can cope up emphasises the double role of risk management with a financial disaster and sustain themselves for a instruments— protecting basic livelihood as well as year through their current savings? How many Indian promoting risk taking. families are at a financial risk if they lose their primary breadwinner? Unfortunately, no systematic and In most developed countries, governments provide comprehensive empirical assessment of such efforts financial benefits to citizens who are eligible on grounds has been made in the Indian context. An important of unemployment, sickness, old age, disability etc factor contributing to this is the paucity of reliable through government-aided social security programmes. data (that is accessible and timely). The situation in developing countries like India is very different. Here, unemployment insurance is unheard of To determine the answers to these and many more and state pension barely covers a small fraction of the questions on the financial health of Indian households, in Indian public. Healthcare is often thinly or sporadically June 2005, Max New York Life Insurance Co. Ltd. and provided, education is typically limited to primary school, National Council of Applied Economic Research (NCAER) and assistance to the infirm and disabled is usually undertook a comprehensive household survey called negligible. The sheer size of population and the acute “India Financial Protection Survey”. This survey was resource constraints make it difficult for governments to concluded concurently with the “National Survey of provide robust social security programmes. Household Income and Expenditure” which covered Indian families across the length and breadth of the Since India is the largest democracy in the world with country. The major purpose of the study was to provide enormous socio-economic and cultural diversity, the an objective measure of the economic wellbeing of limited capacity of some households to protect Indian families by evaluating their level of financial themselves against contingencies (that threaten to lower security and vulnerability as compared to their financial their living standards) tends to be the primary factor that risks, based on their earnings, expenditures and savings. determines their levels of investments, their ability to Also, this study was aimed at understanding the take advantage of economic and social opportunities for significance of life insurance as a risk-mitigating tool for their financial advancement. There is not much Indian households and to arrive at a risk profile of Indians awareness about the need for financial protection, and across various socio-economic and demographic groups. India Financial Protection Survey 11
  20. 20. 1.2 About the survey To increase accuracy and ensure adequate item Since its inception, the NCAER has initiated long-term response, the survey was conducted by adopting face- research programmes in the field of income, to face interviews of heads of households as well as investment and savings. The most recent study – their members using a questionnaire-based approach. known as the National Survey of Household Income Non-response and non-sampling errors were reduced and Expenditure (NSHIE) – was undertaken to generate by conducting focus group discussion, proper training a more robust and reliable estimate of household of interviewers and supervision. income. The Max New York Life – NCAER India Financial Protection Survey (IFPS) rode on this study. Survey Detailed information was collected on the procedures such as approach, concepts and demographic profiles of households, their definitions, sample design and sample size, content of composition, components of household income, the questionnaire and estimation procedure were consumption expenditure and on relevant qualitative executed after reviewing best international practices1. indicators related to economic activities of households. Details about concepts, definitions and survey An exclusive module containing aspects such as the methodology used in survey are given in Annexure I. motivation to save, reasons for saving, preferred mode of saving, investment, borrowing, household This survey was aimed at generating reliable estimates economic shocks, insurance, perception about at the states-level covering both rural and urban India. well-being, etc were canvassed to all sample Both quantitative (sample survey) and qualitative households to measure the level of financial (PRA/RRA techniques) approaches were employed to vulnerability. generate the primary data. A multi-stage stratified sampling scheme was adopted to generate 1.3 Importance of the study representative samples. Sample districts, villages and For a nation that is among the world’s fastest growing households form the first, second and third stages, economies, it is imperative to measure the economic respectively, for selection of the rural sample while well-being of its citizens on an ongoing basis. By cities/towns, urban blocks and households are the tracking the various parameters that contribute three stages of selection for the urban sample. towards the social and economic well-being of the people and their ability to protect themselves and Sample size and its distribution were determined on their families against unforeseen crisis, the findings of the basis of the accuracy required and the resources this study would help arrive at a true measure of available. In rural areas, a sample of 31,446 economic well-being of India’s populace. households out of preliminary listed sample of 210,439 households was covered which were spread One of the critical findings of this study is the sheer over 1,976 villages in 250 districts and 64 NSS regions lack of awareness about financial protection in rural, covering all major states. Similarly, in urban areas, a as well as urban India. Remarkably, although sample of 31,570 households, out of a preliminary economists and social planners are aware of gaps in listed sample of 240,353 households, was spread over social security, citizens on their part too are quite 2,255 urban wards in 342 towns and 64 NSS regions callous and unaware of the need to protect covering 24 states. themselves financially. The findings of this study are 1The major sources reviewed includes Situation Assessment Survey of Farmers (NSSO); Integrated Household Survey (NSSO); Employment and Unemployment Survey (NSS); All India Rural Household: Survey on Saving, Income and Investment (NCAER 1962); Survey on Urban Income and Saving (NCAER 1962); Market Information Survey of Households (1985-2001, NCAER); Micro-Impact of Macro and Adjustment Policies (MIMAP, NCAER); Rural Economic and Demographic Survey (NCAER); Expert Group on Household Income Statistics, Canberra Manual; Household Income and Expenditure Statistics (ILO); Chinese Household Income Project (1995) and Household Income and Expenditure Survey (Sri Lanka) etc. 12 India Financial Protection Survey
  21. 21. unique as no comparable data exists for the country Chapter 3 presents a similar analysis of the households’ prior to this study. Therefore, this study is an routine and non-routine expenditure. It is followed by a eye-opener, not just for marketers of insurance box – Estimates of Financial Vulnerability. This box products but also for policy and decision-makers in analyses financial vulnerability across parameters like the government. household income, education levels and occupations. This survey is also important in view of the fact that In Chapter 4, savings, its distribution and different forms National Sample Survey (NSS) 61st round (2004-05) the in which savings is held are discussed. In addition, this data on household consumer expenditure is available chapter also discusses the household saving behaviour and this provides an opportunity to attempt a elaborating some relevant aspects such as motivation to meaningful comparative analysis through these two save, preferred forms of savings, perception about the data sets. It is hoped that the resultant data sets will stability of the main source of household earnings and be useful to different sets of users such as core managing economic shocks. This is followed by a researchers, policymakers and service providers. box – Profile of Investors. This box analyses the profile of households that invest in financial instruments – such as This study has demonstrated that it is not impossible small savings, stocks and insurance – across parameters to collect reasonable data on income, expenditure and such as income levels, occupation and education. savings. Thus, the resulted approach, survey methodology and related experiences will add new Chapter 5 exclusively focuses on life insurance and has dynamism in this area and will be helpful in such detailed findings on awareness about life insurance, studies in the future. ownership of life insurance among Indian households and the size of insurance premium payments. 1.4 Plan of the report Socio-economic and demographic characteristics of This report has six chapters, five boxes and one insured versus uninsured households are examined annexure. The major findings of the study are with a view to learn more about the enabling factors presented in the Executive Summary, in the beginning in order to increase the volume of household savings of the Report. The present chapter introduces the in this form. The last box – Potential Market for Life study. It is followedly a box – Reliability of Estimates. Insurance – takes a closer look at the profile of We have compared the findings of this survey with households that have the purchasing power and are those of NSS 61st Round and Census 2001 in order to aware of insurance, but are not insured. This segment check the reliability of the estimates. comprises an immediate market potential that existing players in the industry can exploit. Chapter 2 gives a detailed analysis of the household earnings relating to socio-economic and demographic This box is followed by Chapter 6 – The Way Forward. characteristics of households. It is followed by a box – It takes a closer look at the lacunas in the system, Income Inequality. It takes a deeper look at income insofar as life insurance is concerned and recommends inequalities based on parameters such as socio- steps that need to be taken (by the service providers, economic groups, education, income levels and policy-makers, NGOs and the corporate sector) in order ownership of consumer durables. to ensure better financial security at the country level. India Financial Protection Survey 13
  22. 22. RELIABILITY OF ESTIMATES Surveys often tend to bring to fore certain stark trends and statistics. And invariably, doubts are raised over the reliability of such data. Do we really need to view income and expenditure data generated through a survey with caution? While there is no foolproof method by which one can establish the reliability of all survey results, there are procedures which when adopted, can raise the degree of confidence one can place in the findings of a survey. The most widely used and fruitful procedure is to compare the survey estimates with the estimates generated by other reliable sources. The Max New York Life-NCAER India Financial Protection Survey has attempted to compare some of the important indicators and estimates in this study with that of other reliable data sources, such as Census 2001, (interest, pension, remittances, rent, etc). While National Accounts and even the National Sample estimating expenditure, both routine (food, housing, Survey (NSS) 61st round. health, education, transport, consumer durable, etc) and non-routine (social ceremonies, large education, This survey’s estimate of average household size medical, leisure travel, etc) expenditures are taken (4.99 members) appears consistent with the into account. estimates obtained from NSS 61st round (4.89 members) and Census 2001 (5.37 members). A While the NSS 61st round (2004-05) gives an annual similar pattern is also observed in the case of the monthly per capita expenditure (MPCE) of Rs 725, sex ratio – this study estimates the sex ratio at 927, estimates from the current survey peg this figure at against 950 by NSS and 933 by Census 2001. All the Rs 678. Figures for different groups like the SC/STs three data sources are also fairly comparable on and OBCs are also remarkably similar. some other parameters, such as the distribution of households by socio-religious groups. These results Gross income, as estimated by this current study, is are presented in the figure below. found to be around 56 per cent of the personal disposable income provided by the National Accounts A common problem faced by such surveys is the Statistics (NAS). An estimate of surplus income (as an under-statement of economic data (income, indicator of savings) is arrived at by subtracting the expenditure and savings) by the respondents. This total household expenditure from the total household leads to a higher margin of error in the estimates of income. Through this method, this survey found income and expenditure. The total income of estimates of savings as a proportion of disposable households is arrived at after considering incomes income to be 22.2 per cent, as against the official from salaries and wages, self-employment in non- estimate of 27.1 per cent for the year 2004-05. These agricultural activities, labour (casual and agricultural differences in estimates can be attributed to the labour), self-employment in agriculture, others following factors. One, this survey did not cover some 14 India Financial Protection Survey
  23. 23. of the smaller states and union territories which One of the major objectives of this study was to account for about 4 per cent of the population. Two, generate a reliable estimate of household income. according to the Central Statistical Organisation (CSO), The standard error and coefficient of variation of the the household sector by definition comprises of estimated average household income for various individuals, non-government non-corporate income quintiles is consistent and within permissible enterprises of farm business and non-farm business limits. This generates a fair degree of confidence in like sole proprietorships and partnerships, and non- the estimates presented in this report. profit institutions. This survey, on the other hand, covers only households. Three, certain components Another important source of error, which can vitiate of income are not perceived as income by the the estimates, is the non-response rate. In the case respondents and hence they get excluded from of this survey, it was around 3 per cent and largely incomes reported in income surveys. Items like due to unanticipated reasons such as the reimbursements for travel, medical and other such psychology of the respondent. Non-sampling errors expenses are not reported correctly in this survey. arise mainly from three sources. One, respondents refuse to cooperate and deny information; they To check the data reliability, a variety of methods supply partial information that may not be usable; are used. The most common amongst them are or they deliberately provide false information. Two, evaluation of sampling and non-sampling errors. the interviewers are also prone to have some Sampling errors are measurable within the preconceived notions whereby some biases creep framework of the sample design and are also into the schedules. Three, respondents may not controllable by varying the size of the sample. For remember all the relevant numbers sought by the instance, the average income per household is interviewers. And this tends to considerably Rs 65,041 and its standard error is Rs 4; the average increase the margin of error in the data collected. amount of life insurance payments made per household is Rs 1,227 and its sampling error is There is no satisfactory procedure for a precise negligible -- at Re 1. Nearly 6.2 per cent of all urban measurement of non-sampling errors. A team of households reported payments towards life trained interviewers (250), supervisors (50) and insurance and their (average) insurance payment NCAER professionals (14) from different language amounts to Rs 2,528. This estimate is subject to a groups were engaged for about four months to standard error of Rs 2. undertake the task of primary data collection. The India Financial Protection Survey 15
  24. 24. field team was thoroughly trained through all the procedure to correct data at the household phases of the surveys. Every care was taken to level. Therefore, all the estimates - income, implement maximum possible quality control in expenditure, savings etc - presented in recording of the answers of the respondents. subsequent chapters are based on two factors – the population covered by this survey and what Before we turn to the next chapter, here’s a was reported by the respondents. It is word of caution. While there are possibilities of important to keep these limitations in mind making adjustments to survey estimates at the while drawing any conclusion from the results aggregate level, there is no satisfactory presented in this report. 16 India Financial Protection Survey
  25. 25. CHAPTER 2 HOW INDIA EARNS The large differences in income, expenditure and savings patterns between rural and urban India are a pointer to how things will unfold as urbanisation levels in the country increase. Urban households earn around 85 per cent more than rural ones, spend three-fourths more and, as a result, save nearly double that of rural households. Much of this can be explained by differences in profession and education. Even for the same profession and levels of education, urban earnings are higher. The lowest income quintile accounts for 22.4 per cent of the population and just 6 per cent of income. But India is changing rapidly – the middle classes, which accounted for 2.7 per cent of the population in 1995, accounts for 8.3 per cent today2. However, the regional disparities are a matter of concern. Two-thirds of the poor reside in the 10 low-income states. According to the Max New York Life-NCAER India Since only 17 per cent of women work, the average Financial Protection Survey , there are 205.9 million 3 number of workers per household is 1.4 (1.34 in urban households in the country, of which 30 per cent (61.4 areas and 1.43 in rural ones). And around 28 per cent million) live in urban areas and the rest (144.5 million) of the country’s population is engaged in financially in rural areas. Given that urban families are marginally remunerative job of some sort. Indeed, 68.8 per cent smaller than rural ones, the share of India’s urban of households have just a single earning member while population is slightly lower — at around 28.6 per cent. 23.7 per cent have two earning members and 7.5 per While the average family size in the country is 5 cent have more than two earning members. members, less than one per cent of Indian households are single-member ones and around 10 per cent have At the all-India level, when we analyse households on more than seven members. the parameter of highest literacy amongst their members, we find that 19 per cent have members who have passed middle school (8th class), nearly a fourth (23 per cent) of households have at least one member who has completed high school (10th class), and 18 per cent higher secondary (12th class). At the all-India level, 17 per cent of all households have at least one graduate member – the figure is 30 per cent for urban areas and 11 per cent for rural areas. 1The Great Indian Middle Class, NCAER (2005), defines the middle class as those households with an annual income of between Rs 2-10 lakh at 2001-02 prices. 2The Survey was undertaken concurrent to the NCAER’s National Survey of Household Income and Expenditure (2004-05), attempted to generate reliable data on household income in the country. India Financial Protection Survey 17
  26. 26. 2.1 INCOME-EXPENDITURE PROFILE areas versus Rs 40,309 per annum in rural ones), the The average household in India had an annual income 3 difference in the surplus income (of urban and rural of Rs 65,041 in 2004-05, and an expenditure of areas) that can be saved or invested is not all that huge Rs 48,902, leaving it with a surplus of Rs 16,139 to save in absolute terms. The average urban household saves and invest. Urban income levels are around 85 per cent nearly double that of a rural household (Rs 26,762 per more than rural ones (Rs 95,827 per annum versus annum in urban areas versus Rs 11,613 for rural areas). Rs 51,922 per annum). Since expenses in urban areas are substantially higher (Rs 69,065 per annum in urban 2.2 INCOME BY OCCUPATION Labourers constitute the largest segment of the population, heading a little over 31 per cent of the country’s households; self-employed agriculturists are the next largest segment (30.3 per cent), salaried members account for a little over 18 per cent and the non-agricultural self-employed account 17.5 per cent of the country’s households. The figures differ for rural and urban areas – while the salaried account for just 10.5 per cent of rural households, in urban areas they account for 36.9 per cent. Income levels vary significantly across rural and urban areas, as well as across occupation groups. The self- employed in agriculture comprise the largest group in rural areas, accounting for 41.3 per cent of the population and 42.8 per cent of income – in other words, they are the average rural household. In urban 3Household income is often misunderstood by survey respondents, especially the self-employed who tend to state income as net of even consumption expenses instead of just netting out production expenses. So some degree of under-reporting is possible. 18 India Financial Protection Survey
  27. 27. Figure 2.4: Share of population and income by occupation of chief earner - Rural % share in population and income 0 10 20 30 40 50 Regular 10.5 19 salary/wages 19.5 Self 11.5 employment in 13 non-agriculture 14.7 34.6 Labour 6 20.2 Self 11 41.3 employment 42.8 in agriculture 2.1 14 Others 2.8 0 5 10 15 20 25 30 35 PCI (Rs.000 per annum) % share of population % share of income PCI (Rs. 000 per annum) areas, by contrast, this group accounts for just 3.1 Figure 2.5: per cent of the population and just 2.6 per cent of Share of population and income by total urban income – this is despite the fact that occupation of chief earner - All India urban agricultural households earn nearly two-thirds % share in population and income more than their rural counterparts (Rs 91,133 per 0 10 20 30 40 annum versus Rs 55,491 per annum). Regular 18.1 22 salary/wages 30.8 There is not too much difference in the income levels of the non-agricultural self-employed and those earning Self 17.5 19 employment in regular salaries in urban areas, though the difference is non-agriculture 25.0 as high as 45 per cent in rural areas. Those earning 31.2 salaries account for around 37 per cent of urban Labour 6 15.6 households and a little over 45 per cent of the total income earned by all urban households. In the case of Self 30.3 employment the self-employed in non-agricultural areas, the second 11 25.1 in agriculture largest group at 32.5 per cent of urban households, the 2.8 share of total income is around 38.1 per cent. Others 16 3.5 0 5 10 15 20 25 30 35 Those households whose chief earners are labourers, PCI (Rs.000 per annum) not surprisingly, account for a higher proportion of % share of population % share of income total households as compared to their share in overall PCI (Rs. 000 per annum) India Financial Protection Survey 19
  28. 28. income levels, and this is even more true for urban 2.3 INCOME BY AGE-GROUP areas. Households headed by labourers accounted for Though India’s demographic profile is changing and 34.6 per cent of rural households and 20.2 per cent of India is getting younger, it is the higher age-groups rural incomes; in urban areas, the figures were 22.9 that earn more. Those in the 55-65 year age bracket, per cent and 9.7 per cent respectively. While urban for instance, comprise 2.6 per cent of the population labour households earned 37 per cent more than their at the all-India level but 3.1 per cent of the total rural counterparts, the lower relative share in income income. Households whose chief earners are in the 46- levels in urban areas is a function of much higher 55 year age group account for 21.9 per cent of the incomes for other social groups. At the all-India level, all-India population and 25.2 per cent of the all-India the labour class has the largest difference between the income. share of such households in the total population (31.2 per cent) and the share in total income (15.6 per cent). Average household income, at the all-India level, rise The self-employed in agriculture are the only other from Rs 47,192 per annum in the case of households group, where the population share (30.3 per cent) is where the chief earner is below 25 years old, to higher than the income share (25.1 per cent). But the Rs 55,663 in the 26-35 year age group, to Rs 85,841 difference here is much lower. Figure 2.6: Figure 2.7: Share of population and income by age of Share of population and income by age of chief earner - Urban chief earner - Rural % share in population and income % share in population and income 0 10 20 30 40 0 10 20 30 40 4.6 Less 5.2 9 Less 16 than 25 4.5 than 25 3.6 9 25.1 18 24.9 26-35 26-35 22.4 Age of chief earner (Years) Age of chief earner (Years) 22.3 10 36.4 19 36.9 36-45 36-45 34.4 34.9 22.7 24 11 21.6 46-55 46-55 26.8 23.9 8.8 8.9 55-65 22 55-65 13 9.7 11.3 2.1 2.7 66+ 25 66+ 13 2.6 3.6 0 5 10 15 20 25 30 35 0 5 10 15 20 25 30 35 PCI (Rs.000 per annum) PCI (Rs.000 per annum) % share of population % share of income % share of population % share of income PCI (Rs. 000 per annum) PCI (Rs. 000 per annum) 20 India Financial Protection Survey
  29. 29. per annum for households where the chief earner is rural area earns almost double (Rs 99,243 per annum) above 66 years old. Since this is as true of rural India as the average for all rural households (Rs 51,922 per it is of urban India, presumably the earnings are not annum). As a result, while such households account for from professional income alone but from savings and 10.5 per cent of all rural households, they account for investments and ownership of land. 19.5 per cent of all rural incomes. In both rural and urban areas, households with chief Similarly, rural households headed by labourers earn a earners in the 36-45 year bracket account for the lot less than their counterparts in urban areas – yet, biggest share of both the total population as well as the the share of such households in total income is a lot total income. At the all-India level, 36.5 per cent of all less adverse than it is in urban areas. Such households households are headed by a person in the 36-45 year comprise 34.6 per cent of rural households and 20.2 age group – these households account for 34.6 per cent per cent of total rural income; in urban areas, the of the total income at the all-India level. The average figures are 22.9 per cent and 9.7 per cent respectively. household income for this age group is Rs 61,787 at the all-India level. In rural areas, such households account for 36.4 per cent of the total population and 34.4 per cent of income. For urban areas, the figures are 36.9 per cent and 34.9 per cent respectively. 2.4 RURAL-URBAN DIVIDE Given that agriculturists are the largest group in rural India, it is not surprising that rural income levels are just slightly more than half of those in urban areas. More importantly, at every level of education and occupation, urban income is higher than those in rural areas. In the case of the salaried class (such households comprise 36.9 per cent of all urban households and 10.5 per cent in rural areas), urban salary levels are around 15 per cent higher (the household income is Rs 114,545 per annum in urban areas versus Rs 99,243 in rural areas). For labourers (34.6 per cent of rural households and 22.9 per cent of urban households), urban earnings are 37 per cent higher than rural ones; 2.5 IMPACT OF EDUCATION it is 74 per cent in the case of the non-agricultural self- Most chief earners who are educated up to high school employed and 64 per cent higher in the case of (10th) tend to be self-employed in agriculture (between households headed by agricultural labourers. 46 and 52 per cent of such households). However, once the chief earner in rural areas has passed higher Another way to look at the rural-urban disparity is to secondary (12th), things change. Just 31.2 per cent of compare the population shares with income shares rural households cited self-employment in agriculture as across rural and urban areas. Households headed by their primary source of income when the chief earner salary earners in rural areas earn less than what they had passed higher secondary – 35.9 per cent of do in urban areas. The average salaried household in households in this group earn their income from regular India Financial Protection Survey 21

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