THE Universal Declaration of Human Rights adopted by the UN General Assembly in 1948, to which India subscribes, mentions the right to choose in two of its thirty articles. Article 23 says everyone has a right to free choice of employment. Article 26 says parents have a prior right to choose the kind of education that shall be given to their children. As the feminist movement evolved, women began to assert their freedom to reproductive choice. Various federal states in the USA are now urged to recognize same sex marriages as a legitimate choice. Choice is indicative of the degree of freedom in a society. The more mature a society, the more the choice available to its people in the social, personal and economic spheres.

Choice is a luxury; hard earned and rare for some while for others it is a given. People in Afghanistan, for instance, cannot easily exercise their right to choice of clothes and music because the Taliban dictates their lifestyle. However, a British housewife buying groceries in Tesco in London, would be overwhelmed by the choices on offer. A similar wide variance in the right to choice is visible between rural and urban consumers in India.

In India, the landmark year for the consumer movement was 1986, when the Consumer Protection Act (COPRA) was passed. The act established a Central Consumer Protection Council, whose objective was to promote and protect the following rights of consumers – the right to safety, right to information, right to choice, right to be heard, right to redress and right to consumer education. The right to choice was described in the act as the right to be able to select from a range of products and services, offered at competitive prices with an assurance of satisfactory quality.

The passing of the act did not immediately bestow a plethora of choices on Indian consumers. The evolution of choice in the market-place is a slowly unfurling process, buttressed by policy changes and socio-economic growth. But it has transformed the Indian consumer’s world. It would not be wrong to say that among the six consumer rights enshrined under COPRA, the one that has most benefited from the opening up of the economy is the Indian consumer’s right to choice.

Those who grew up in the pre-reform era of the 1970s and ’80s, in erstwhile socialist India, will recall that in every product category, a consumer had only two or three brands to choose from. As the government’s policies did not encourage entrepreneurship, a few large manufacturers provided most goods and services to the Indian public – a classic case of monopolies and cartels. Even the airwaves were restricted and there was only one TV channel, the state controlled Doordarshan. Life for the Indian consumer was indeed staid and dull while one heard stories about the sheer variety of consumer goods that were available in the markets of western countries and even those of the Asian tigers.

 

However, after the reform process began in 1991, we have seen dramatic changes in our lifestyle and consumption patterns and an explosion of choice in many spheres. The factors which supported this are:

1. Free entry into previously state controlled sectors. An example of this is the entry of private players in the domestic airline industry. A host of budget airlines like Air Deccan, Go Air, Spice Jet and Indigo entered the market and the Indian flyer no longer had to forcibly fly the badly run, state owned Indian Airlines. A 2005 advertisement of Air Deccan showed a poor villager taking his first flight, after his son sent him a ticket. The closing line stated: ‘For millions of Indians flying is no longer a dream.’ This was indeed true. Suddenly, Indian passengers had a choice between train and air travel, because with the arrival of low cost airlines, airfares were competitive.

2. Technology and the internet. Technology has revolutionized our choices in many everyday activities. Before the railways set-up the IRCTC website, passengers had to stand in queue at railway stations or contact agents to book a ticket. Now one can even choose a berth with the click of the mouse. Similarly, online booking of cinema tickets has removed black marketeers from the scene. Through travel portals, a consumer can get a detailed list of all the airlines flying to a particular destination and make a suitable choice. Or choose hotels or places to visit, even when planning a trip abroad, by visiting travel planning sites like tripadvisor.com – unthinkable before the internet era. Sites like mouthshut.com allow consumers to review products and services, virtually democratizing the marketplace. Depending on the ratings awarded by users, a consumer can choose to make the purchase or not.

3. Government policies favouring entrepreneurship. First time entrepreneurs have managed to create successful brands and companies in the past couple of decades that have brought about a remarkable change in the way Indians buy goods. For example, makemytrip.com, a pioneer in travel portals, was created by a first time entrepreneur. In the seventies and eighties, unemployed young men would stand in line at the employment exchange. Now young people visit naukri.com from their homes and choose which industry they would like to apply to. The boom in retail which has created Big Bazaar and other chain stores offering discounts in rates and convenience to millions of Indians, are all a product of a change in the government’s outlook towards new businesses post the opening up of the economy.

 

And yet, 25 years since the Consumer Protection Act, the right to choice has morphed in unexpected ways resulting in vastly different experiences among urban and rural consumers, illustrative of a dichotomy where the right to choice has been rendered irrelevant for both the city consumer and his village counterpart, though for entirely different reasons.

For vast swathes of consumers in India’s rural areas, the right to choose a financial product is restricted by their illiteracy. A December 2009 RBI report, ‘Financial Inclusion: Challenges and Opportunities’, points out that the country has 600,000 habitations – clusters where the population is 100 or more – but only 30,000 have a commercial bank branch. Less than half the population has a bank account, with the disparity greater in the North East. Only about 10% of the people have life insurance, and less than 1% have other types of insurance. A full 37% of the population still lives below the poverty line.

 

The main challenge, bankers point out, lies in financial education: helping the masses to understand these products, and the benefits of saving and investing. According to a report, ‘How India Earns, Spends and Saves’, published by the NCAER in 2007-08, while medium and large farmers save about 39% of their incomes, this declines to nearly 20% in the case of small and marginal farmers. Landless households have the highest tendency to save in the form of cash at home, and the lowest tendency to save it in a bank account. While 51.6% of them kept their meagre savings in cash at home, this figure fell to just 36% for large farmers. Nearly 54% in this group kept their savings in the bank. However, in the absence of financial literacy, even those among the rural poor who have bank accounts keep virtually no money in them, not because of affordability but because they are ignorant about the value of saving.

In light of the above, one gets a reasonable understanding of financial health of rural families. About a fourth of rural families are financially vulnerable, i.e., all those households whose total reported income is less than its total (routine and non-routine) expenditure. It is worth noting that the state of vulnerability is not limited to poor households. Even prosperous households can be financially vulnerable. For instance, while 28% of landless households are financially vulnerable, the figure for both medium and large farmers is 23%. Further analysis of data indicates that a majority of vulnerable households are unable to manage their unplanned expenditure through current savings. This also suggests that such households do not plan for their future; nor do they save long-term.

Thus the right to choice of financial instruments remains fairly irrelevant among rural consumers because they are unaware about the choices available to them for saving or do not trust them enough to change their long entrenched patterns of behaviour.

 

Contrast this with the investment choices available for a middle class professional in a metro city in India. With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving investors a wider choice of fund families. The number of mutual fund houses increased, with many foreign mutual funds setting up shop in India. The industry also witnessed several mergers and acquisitions. As per the Association of Mutual Funds of India (AMFI), at the end of January 2003, there were 33 mutual funds with total assets of Rs 1,21,805 crore. In March 2008, there were 33 mutual funds floating 956 schemes! In March 2011, the asset base of mutual funds had grown to Rs 5,92,250 crore. Funds come in mind-boggling variants. They may be open or closed ended, growth or income, balanced or money market funds, depending on the investor’s objective. An equity fund may invest in small cap, blue chip, large cap, medium cap or growth stocks. Other types include tax saving funds, index funds, exchange traded funds or sector specific funds.

 

In her acclaimed book, The Art of Choosing, Sheena Iyengar of Columbia Business School says that beyond a certain point choice is counterproductive to consumers. That point is not yet determined and may be different for different industries. Beyond that point, a consumer experiences confusion and cognitive dissonance and may well make choices detrimental to his long-term interests. She establishes this through various studies, the earliest of which came to be termed the jam experiment. The jam experiment (‘When choice is demotivating: can one desire too much of a good thing?’) was tried in a high-end store in Menlo Park, California. On one table were six jams and on the other 24. Consumers were asked to taste the various flavours on these tables. Researchers found that consumers who tasted fewer jams were more likely to purchase those jams than the other set who tasted 24 jams, got confused and just walked away, probably experiencing negative emotions like dissatisfaction. More is less, she claims, that is, more choice is actually less beneficial to consumers. That precisely explains the predicament of the urban Indian investor.

It is impossible for an investor to keep pace with the frenetic pace at which this industry is growing. Many schemes are being pushed so aggressively that the average consumer is typically lost about which one will best suit his investment needs. It becomes even more difficult to make the right choice in the face of pushy relationship managers from banks and fund houses who have their own short-term targets to meet, and rarely take a decision from an investor’s perspective. The Indian stock market is very volatile and is dependent on foreign investment and a host of variables that are beyond the understanding of most customers. Even so-called experts are way off the mark when it comes to predicting market behaviour. In that scenario, the investor’s right to choose amounts to nothing because he is not really choosing. He is being led to choose by someone who has his own short-term agenda to fulfil and who is himself dealing with variables that he has no control and understanding of.

 

Further, mutual funds are just one product. The basket of financial instruments include others like Initial Public Offerings, government bonds, gold, futures and options, and infrastructure bonds. An investor visiting his bank to do some routine transaction will be pushed one of these, depending on the flavour of the month. There is enough evidence to show that small investors do not adequately understand the risks associated with a scheme. If they see ‘tax saving’ or ‘insurance’ in the name of the scheme, they will put their money in it, only to exit later with losses and regret.

Both the urban and rural consumer need education to be able to truly exercise their right to choice in the financial market. The rural person needs to be taught the value of saving and explained why hiding cash under the bed is not a prudent choice. The city investor needs a third party regulator who holds his hand through the maze of options, and ensures he is not misled by financial industry executives who have a direct interest in where the money goes.

In the absence of this, neither urban nor rural consumers are exercising their right to choice in any meaningful sense while buying products or making savings and investment decisions.

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* Vandana Vasudevan is the author of the forthcoming book, Urban Villager: Life in an Indian Satellite Town.