Opinion | India’s cautious adoption of behavioural economics

Opinion | India’s cautious adoption of behavioural economics

Finance minister Nirmala Sitharaman. (HT)

This year’s Economic Survey, India’s flagship economic policy vision document, contained an in-depth chapter on policymaking for “Homo sapiens, not Homo economicus”. This chapter’s purported rationale was to focus on how past policies have already leveraged insights from behavioural science, and also provided a road map for future policies to incorporate common psychological principles in their nudges. It concludes with a suggestion to set up a nudge unit in India, taking the popular view that nudges alone cannot be a policy panacea, but must be used alongside market mechanisms (called “laissez faire”), incentives and laws (called “mandates”). The budget presented on 5 July by finance minister Nirmala Sitharaman had a few references to behavioural principles in improving tax compliance and the Swachh Bharat Mission (SBM). This analysis aims to critically assess the report’s incorporation of behavioural science in policy, with special reference to past work already done in India.

As noted before, there is tremendous potential for using the insights of behavioural economics in Indian policy. According to the Organisation for Economic Cooperation and Development, there are more than 202 government institutions using behavioural insights around the world. With the exception of a few countries in Africa and South America, no nudge unit is based in a developing country. This might be due to design issues as well as state capacity in developing countries.

In such a context, it was refreshing to see the Economic Survey bat for nudges in India. However, in many cases, the applications of behavioural insights appeared to be a result of confirmation bias (to the extent that past policies were viewed with a behavioural lens). For example, the Give It Up campaign did not specifically target Above Poverty Line households with its messaging, and the give-up rate was under 10% on an average across states. Community-led sanitation schemes, part of the SBM, did include steps to change behaviour, but advertising campaigns such as the Beti Bachao Beti Padhao scheme did not target specific states where child sex ratios were already skewed (although past research indicates that it was effective in Haryana, which has a very poor sex ratio). Thus, although the policies appeal to the appropriate principles, their implementation does not necessarily follow the typical modus operandi of nudges as implemented elsewhere. This is particularly the case where the measurement of effects via causal mechanisms is feasible, but has not been pursued.

This can perhaps be related to the lack of targeting at specific subpopulations characterized by the policies cited in the Survey. For example, mass media and advertising campaigns (such as the Jan Dhan Yojana) with messages are often not aimed at any particular group (e.g. unbanked individuals), whose behaviour policy seeks to change. Furthermore, various suggestions in the Survey that are aligned with Mahatma Gandhi’s seven sins and religious scriptures are well appreciated, but come with caveats. For instance, complying with tax payments is often not seen as a debt to be paid (or an obligation to be fulfilled), but rather as an effortful chore that can be avoided.

Indeed, in this context, the Survey’s suggestions to improve tax compliance are worth examining. The chapter suggests the pre-filling of income tax forms as a useful way to reduce the effort associated with filing returns. As the finance minister announced in her budget speech, this is precisely what the government has now proposed for easing the process of filing tax returns, acknowledging that taxpayers are inherently cognitive misers, as behavioural economics suggests. There are, of course, other proposals that run counter to what behavioural science suggests would be effective and may also be against the current government policy stance. Consider the proposal to publicly recognize highest taxpayers in a circle by naming buildings after them (section 2.36); this could easily lead to a backlash among lower taxpayers, and hurt tax morale disproportionately. It also runs counter to the higher surcharge proposed in the budget on the country’s higher-earning taxpayers.

Finally, the earlier work done by organizations such as Final Mile finds no mention in the chapter. Having worked to reduce railway-related deaths, improve financial inclusion, among many others, existing efforts to incorporate behavioural science in policy must be acknowledged and taken as lessons for future interventions. Even as government tax agencies, such as the Central Board for Indirect Taxes and Customs, and the Central Board for Direct Taxes, propose to take up nudging in a major way in their policies, there is much to learn from experiences elsewhere.

Steps are being taken by the state governments of Maharashtra and Punjab to consider the role of behavioural economics in tackling issues where policy has thus far been stonewalled. One of the ways in which policy can learn is to test and pilot interventions at a smaller scale before being convinced of their utility. In this matter, the chapter in the Economic Survey provides many useful starting points (e.g. default flu shot appointment times, reminders of local social norms regarding banking behaviour, and pre-filling of tax returns) across a variety of policy domains. Indeed, it would appear that it is less of a problem of when to start, and now just a question of where.

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