Budget catalyses financial inclusion, spurs MF culture in rural India

One of the reasons why a few sovereigns of Gold command immense respect in India compared to interest-earning assets such as mutual funds is the lack of awareness in the rural markets. In fact, every bumper Kharif or Rabi output season in India results in an increase in gold prices across the country.

Rural India which contributes nearly 16-20% to the GDP and employs close to 42% needs to be uplifted. It is this demography that would push India early to its economic objective of being the fourth largest economy by 2047 – a $35 trillion economy. One way to uplift rural India is by focusing on financial inclusion. After all, importing Gold may be a terrible idea – it drains the fiscal deficit and doesn’t fetch its owner any interest.

How can mutual funds help?

India’s recently announced economic survey recognises the mutual fund industry as a crucial avenue in “channelling financial savings towards risk capital formation.” The analysis details the doubling of unique investors from 2.9 crore in FY21 to 5.6 crore as of December 2024. Mutual fund assets under management have risen to ₹66.9 lakh crore as of December 2024, registering a 25.3% growth from March 2024.

The growth of the Mutual fund industry which has also driven capital appreciation for scores of investors has been driven by a market collaboration. And the beauty of this market collaboration is the way it has encouraged investors from smaller towns to participate in the growth journey. An ICRA Analytics report released in 2024 found five states – Maharashtra, Karnataka, Gujarat, West Bengal, and Delhi accounting for nearly 70% of total AUMs in that period.

The mutual fund industry can look at these data points optimistically – there is a huge scope to grow in rural markets and tier-IV cities. And that this can be done by empowering individuals, creating awareness, and creating institutional support for financial inclusion. The Union budget does this by allocating resources strategically and implementing reforms – it also acts as a blueprint to bridge the financial divide and bring millions into the formal financial ecosystem.

Individual and institutional enablement

The economic survey reveals India’s current standings when it comes to financial inclusion – it notes the RBI’s FI-Index increasing from 53.9 in March 2021 to 64.2 at the end of March 2024. By RBI’s own admission, the three pillars of Access, Technology, and Quality provide holistic and inclusive financial inclusion. The beauty of the budget is the way it goes beyond the RBI’s FI-Index pillars.

The value-accretions to the FI-Index include policies centred around improving internet penetration and bank branches in underserved areas; enhancing PPP partnerships; and tailoring financial products to enhance gender and socio-economic indicators. But there’s more to FI-index than the focus on infrastructure.

For an economy that was concerned about falling consumption trends, the biggest boost from this year’s budget has been the revision of tax slabs. The finance minister’s announcement of placing income earners up to ₹12 lakhs at a zero tax has been music to the common man. Naturally, this segment which is aspirational and understands the importance of saving may opt for mutual funds as an investment avenue. It is heartening to note that the ministry has decided to pursue the policy despite the unexpected outcome of foregoing ₹1 lakh crores in revenue.

What makes the budget equally potent is the institutional focus. Having understood the impact that rural Bharat has on the economy, the government may have decided to leverage an institution like India Post to drive rural community hubs. In addition to providing institutional account services, India Post will also be serving credit services, Insurance, and assisted digital services.

On the institutional front, policies on FDI in insurance, rejuvenation of credit-uptake, and MSME-centric policies are likely to benefit not only the Mutual Fund industry but also create an environment of saving. Strategic allocations, reforms, and incentives can help bridge the financial divide and integrate millions into the formal financial ecosystem. With sustained government efforts and collaborative initiatives, India can achieve inclusive economic growth and ensure financial empowerment for all citizens. As financial inclusion deepens, it will contribute significantly to poverty reduction, entrepreneurship, and overall economic development, making India’s growth truly inclusive and sustainable.

Author is MD and CEO of LIC Mutual Fund. Views are personal.