Nudging India: Behavioral Economics and its Cautious Adoption by India

The Rise of Behavioral Economics in the world

Everyone seems to be concerned about behavioural economics these days. Behavioural insights are being incorporated into various legislation by governments. It is being used by commercial companies to advise their marketing strategies. Employer-employee relationships are being shaped by behavioural economics lessons. Even in the academic silos, most applied research teams - other notable social scientists, natural scientists ranging from neuroscientists to behavioural ecologists, computer scientists, and engineers—want to incorporate behavioural economists into multidisciplinary teams so that they can connect their research with behavioural economics insights.

The concept of Nudges

NUDGES – a concept popularised by Richard Thaler and legal scholar Cass Sunstein in their 2008 book – have been shown in behavioural economics to be critical in eliciting the requisite response from individuals, which can decide the success or failure of any policy. NUDGES stands for iNcentives, Understand mappings, Defaults, Feedback, Expect Error, and Structure Complex Decisions. N, U, and S, in my view, are critical to the success of the government's policies to address the consequences of Covid-19.

Why does India need Nudging?

The attractiveness of nudge units stems from the fact that they are cost-effective and do not need additional funding, instead they draw their influence from a fundamental change in policy makers' perceptions of human behaviour. In India, where government involvement is critical and the resource-strapped state machinery faces multiple challenges in meeting the population's needs, a nudge is a powerful tool.

An in-depth chapter on policymaking for "Homo sapiens, not Homo economicus" was included in 2019's Economic Survey, in India's flagship economic policy vision paper. The purported reasoning for this chapter was to reflect on how previous policies had already incorporated behavioural science insights, as well as to include a road map for prospective policies to integrate universal psychological principles into their nudges. It ends with a proposal to create a nudge unit in India, based on the widely held belief that nudges alone cannot be a policy panacea and must be used in conjunction with market structures (also known as "laissez-faire"), incentives, and laws (also known as "mandates").

The use of behavioural economics insights in Indian policy has enormous potential. According to the Organization for Economic Cooperation and Development, behavioural perspectives are used by more than 202 government agencies around the world and India too is taking small, cautious, baby steps towards the inclusion of the same. However, confirmation bias continues to play a role in many of the applications of behavioural insights (to the extent that past policies were viewed with a behavioural lens). The’ Give It Up’ initiative, for example, did not directly target Above Poverty Line households with its messaging, and the average give-up rate across states was under 10%. The SBM included measures to improve behaviour in community-led sanitation schemes, but advertisement campaigns like the Beti Bachao Beti Padhao scheme did not target particular 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). As a result, although the policies are based on sound principles, their execution does not always follow the standard nudge methodology. This is especially true when measuring effects through causal mechanisms is possible but has not been pursued.

This may be due to the policies' lack of aiming at particular subpopulations, as shown by the Survey. For example, mass media and promotional campaigns (such as the Jan Dhan Yojana) with advertisements are often not targeted to any specific community (e.g. unbanked individuals) whose behaviour is being changed. Various recommendations in the Survey that are consistent with Mahatma Gandhi's seven sins and religious scriptures are also well received, but with caveats. For example, tax payments are often viewed as an effortful chore that can be avoided rather than a debt to be paid (or an obligation to be fulfilled). Indeed, the Survey's recommendations for improving tax enforcement are worth considering in this context. It may be suggested that filing income tax forms in advance is a good way to cut down on the time it takes to file returns. This is exactly what the government has suggested making the process of filing tax returns easier, recognising that, as behavioural economics implies, taxpayers are fundamentally cognitive misers. Other ideas, of course, run contrary to what behavioural research indicates will be successful and may even conflict with existing government policy. Consider the idea to publicly honour the highest taxpayers in a circle by naming buildings after them (section 2.36); this could easily elicit an outcry from lower taxpayers, resulting in overwhelmingly negative tax sentiment. It also contradicts the budget's proposal for a higher surcharge on the country's highest-earning taxpayers.

Existing attempts to integrate behavioural science into policy must be recognised and taken as examples for potential initiatives, having managed to minimise railway-related accidents and enhance financial inclusion, among other things. Even as government tax authorities like the Central Board for Indirect Taxes and Customs and the Central Board for Direct Taxes intend to incorporate nudging into their policies in a big way, there's a lot to learn from other countries experiences.

The state governments of Maharashtra and Punjab are taking steps to recognise the importance of behavioural economics in addressing issues where policy has so far been stymied. Testing and piloting interventions on a smaller scale before being persuaded of their effectiveness is one way for policymakers to learn. In this regard, the Economic Survey's chapter offers several useful starting points (for example, default flu shot appointment times, reminders of local social norms about banking conduct, and pre-filing of tax returns) across a range of policy domains.

In conclusion, the question is not whether India requires a nudge unit, but rather how and where one should be implemented. It is not too late to incorporate nudge theory, and the Indian nudge unit will benefit from similar teams' successes and failures. The nudge unit could be called Prabhaav, a Hindi word that means keeping with India's long tradition of naming public policies after localised concepts.

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