Chief Economic Adviser Krishnamurthy Subramanian’s Economic Survey 2018-19 was interesting for its mention of ‘nudge’ theory and the importance of policy nudges.
The Economic Survey, while being guided by ‘blue skies thinking’, emphasized the need for behavioral economics in making policy changes. It said that nudging behavioral change towards better outcomes was a simple way to solve social and economic issues.
The survey, while highlighting the success of Swachh Bharat Mission, Beti Bachao Beti Padhao Mission, or the ‘Give up’ LPG subsidy call, said that policy nudges are already working in India. It specifically made a mention of Swachh Bharat mission and said, “most people want to be seen to behave incongruity with these norms. The fear of community scorn or a desire to fit in or both has led many to renounce open defecation.”
The Economic Survey seems to be greatly inspired and influenced by the Nudge theory, as there are many references to it. Nudge theory was popularised in the book “Nudge: Improving decisions about Health, Wealth and Happiness” by Richard Thaler and Cass Sunstein in 2008. Thaler, who is said to be the father of Nudge theory and for which he was awarded the Nobel Prize in 2017, writes in the book, “by knowing how people think, we can make it easier for them to choose what is best for them, their families and society.”
The authors argued in the book that by harnessing the predictable quirks of human decisions, governments could nudge their citizens to make better choices.
The theory first embraced by ‘the nudge unit’ in David Cameron’s government in the UK in 2010 has since been used by many governments. Nudge offers governments a way of responding to public problems without increasing their regulation, and instead by nudging people towards desirable behavior.
A famous demonstration of the Nudge theory was at the men’s urinals at Schiphol International Airport in Amsterdam. The airport authorities were worried about the spillage on the floor in the men’s urinals.
A brilliant economist suggested a weird idea. His idea was to etch an image of a black housefly in the airport’s urinals, just to the left of the drain. The result was that spillage fell by a whopping 80%! According to Thaler, the “flies were an example of a nudge — a harmless bit of engineering that managed to attract people’s attention and alter their behavior in a positive way without actually requiring anyone to do anything at all” and “men evidently like to aim at targets.”
There are many examples of how the application of nudge can trigger a positive outcome. One such case is the organ donation system in the UK, which requires opt-in from the population through direct mail and online registration.
Faced with increased demand for donor organs and a stagnant number of registered donors, the government used nudge theory to encourage online visitors to government web portals to register. Deep down, people wanted to be donors if they died in an accident and their organs could be used to save someone’s life but, for many reasons, they never registered. All that they needed was a nudge.
The inclusion of the text — “If you needed an organ transplant, would you have one? If so, please help others” — resulted in an exponential increase in registrations. So, opt-in for organ donation prompted people to register at various points, like when they applied for or renewed a driving license.
Initiatives like this by governments on ‘nudging’ have been criticized as an infringement on fundamental rights. However, such policy initiatives are proving increasingly popular.
In India, the Economic Survey recommended ways of bringing in cultural bias in favor of tax compliance by honoring top taxpayers. One of the reasons for tax evasion by individuals is the perception of the services and benefits they get from the government and how the taxpayers’ funds are utilized or misused.
To encourage tax compliance, nudge can come in the form of preferential treatment at airports, fast lane privileges at toll booths, etc., for the top 10 taxpayers in a district. It further says that the highest taxpayers over a decade could be recognized by naming buildings, trains, roads, and universities in their names. On a chapter on ‘Tax evasion
In a chapter on ‘Tax evasion, wilful default, and the Doctrine of Pious Obligation’, the Economic Survey draws heavily from different religions like Hinduism, Islam, and Christianity to nudge people towards desirable behavior and reduce tax evasion.
The survey argues that the repayment of debt in one’s own life is prescribed as necessary by scriptures of all religions. “In Hinduism, non-payment of debts is a sin and a crime. Therefore, it is the duty of his children to save him from such evil consequences. This duty or obligation of a child to repay the debts of the deceased parent is rested upon a special doctrine, known as ‘The Doctrine of Pious Obligation.’”
Is a ‘nudge’ enough to bring about desirable behavioral change in India? Only time will tell.
This article has been originally published in the Deccan Herald on Jul 17.
About the Author
Vasant G Hegde
Vasant G Hegde is a Post Graduate in Economics and a Certified Associate in IIB and a Chartered Financial Analyst. He has been working as Assistant Professor with Manipal Academy of Banking since November 2012 and is currently with Axis Vertical and teaches Economics, Financial Planning, and Banking subjects.