As the financialisation of India’s savings continues on its path, particularly after demonetisation, the reality is that a large section of India’s population is still outside its ambit. An overwhelming majority hasn’t yet made its first mutual fund (MF) investment. Spending, on the other hand, has always been robust.
India is plagued by poor saving habits and neglect of personal health. These problems are deeply intertwined with our desire for instant gratification and the pursuit of quick wealth. At first glance, it may seem that health and savings are unrelated to the quest for instant riches, but a closer examination reveals significant connections.
But there is an innovative way to link consumption and spending to savings. Here’s an idea.
Also read: How not to get carried with every IPO
Can poor health lead to poor saving?
Consider the widespread consumption of harmful substances such as tobacco, alcohol, and pan masala. Despite knowing their detrimental effects on health, many people continue to indulge in these products because they offer immediate pleasure. When it comes to investments if we just look at lottery volumes or gaming bets, we see the same thought process.
This instant gratification often leads to long-term health issues, which, in turn, can result in substantial medical expenses. On the flip side, saving habits tend to be reactive rather than proactive—people generally save only what remains after spending, rather than prioritising savings and investing for the future first.
Sinful spending
A troubling trend is the rapid rise in aspirations outpacing our ability to earn, trapping some individuals in a cycle of debt to support their lifestyle. This discrepancy is glaringly evident when we compare expenditures on "sinful" products with overall savings.
For instance, nearly Rs 23,000 crore a month gets invested in mutual funds through Systematic Investment Plans (SIPs). Expenditures on liquor alone amount to about ₹5 lakh crore. Cigarettes and pan masala contribute an additional ₹1.2 lakh crore each. It's important to note that a significant portion of this spending is in the unorganised, cash-driven market, particularly in rural areas.
Let's break down the numbers. An average consumer might spend Rs 100 to Rs 300 a day on tobacco or liquor. Over a month, this translates to Rs 3,000 to Rs 9,000, and annually, it amounts to Rs 36,000 to Rs 1,08,000. In contrast, an investment of Rs 50 daily in an SIP could yield substantial returns over time. To illustrate, a monthly saving investment of Rs 1500 to Rs 5,000 in a diversified equity scheme over the last ~20 years could have compounded around Rs 25 lakh to Rs 85 lakh today. In fact, the same SIP in any long term Debt scheme would be between Rs 14 lakh -36 lakh.
SIN tax is not tax; it’s actually an investment
Imagine the potential if this hard-earned money were redirected into healthier and more productive avenues, rather than being spent on products that contribute to health issues and financial strain. This brings us to a proposed solution: introducing a “SIN Premium” on consumption of these harmful products. This is not a Tax.
The concept is to levy a surcharge on sinful products—such as liquor or tobacco etc—that would be invested into a dedicated fund. For instance, if you purchase a bottle of liquor for Rs 1,000, an additional Rs 100 could be added as a SIN Premium. This premium would then be invested in a special mutual fund scheme. Each product would come with a QR code that tracks the investment, giving consumers the choice to redeem or shift their investment after completing KYC (Know Your Customer) requirements.
This approach could achieve several objectives:
1. Foster savings: The collected funds would be invested, creating a financial corpus for consumers' families and promoting a savings culture.
2. Formalise the economy from investment side: When a consumer scans the QR code on the product, s/he can claim the money paid for buying the product within 3-6months of purchase. Once the units are credited then it’s the individuals choice to redeem/ transfer units to any scheme with gains made so far. However to do so, s/he must complete the KYC (Know Your Customer), formalities, if not already compliant.
3. Encourage recycling: By involving a QR code system, even discarded product wrappers can be used to claim investment, promoting cleanliness and recycling.
4. Reduce consumption: By making sinful products more expensive through the SIN Premium, consumers might be deterred from purchasing them.
Although implementing such a system poses operational challenges (for instance, the QR code may have limited validity, else this could become a racket of collecting discarded items later), the success of digital platforms like UPI (United Payments Interface) demonstrates that innovative financial solutions can gain widespread acceptance till the last mile. We have to better allocate our existing resources if we can’t increase them and the faster we increase our efficiency the better equipped we are to fight the challenges of the new world. By rethinking our approach to consumption and saving, we could pave the way for a healthier, wealthier, and cleaner future.
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