Syllabus: General Studies Essay Paper: Economy
Application of Behavioural Economics in India.
“How selfish so ever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.” –Adam Smith
The field of behavioural economics blends insights of psychology and economics, and provides some valuable insights that individuals are not behaving in their own best interests. Behavioural economics provides a framework to understand when and how people make errors. Systematic errors or biases recur predictably in particular circumstances. Lessons from behavioural economics can be used to create environments that nudge people toward wiser decisions and healthier lives.
Behavioural economics emerged against the backdrop of the traditional economic approach known as rational choice model. The rational person is assumed to correctly weigh costs and benefits and calculate the best choices for himself. The rational person is expected to know his preferences (both present and future), and never flip-flops between two contradictory desires. He has perfect self-control and can restrain impulses that may prevent him from achieving his long-term goals. Traditional economics use these assumptions to predict real human behaviour. The standard policy advice that stems from this way of thinking is to give people as many choices as possible, and let them choose the one they like best (with minimum government action). Because they know their preferences better than government officials do. Individuals are in the best position to know what is best for them.
In contrast, behavioural economics shows that actual human beings do not act that way. People have limited cognitive abilities and a great deal of trouble exercising self-control. People often make choices that bear a mixed relationship to their own preference (happiness). They tend to choose the option that has the greatest immediate appeal at the cost of long-term happiness, such as taking drugs, and overeating. They are profoundly influenced by context, and often have little idea of what they will like next year or even tomorrow.
There is a big question will it help in policy making and social change? The answer to this question is yes, provided If policy design is thought as the map and development outcomes as the destination, then nudges can be the road signs that gently guide you towards the best route. Formulating these road signs requires expertise at two levels: Understanding why consumers pick less optimum routes (cognitive biases) and Designing signs that guide users to better routes (nudges/interventions).
We can see many instances around the world which defines its success rate, for example In Israel, the issuing or renewal of an ID, passport or driving license, became conditional upon answering the question of becoming a registered donor. The default option was an ‘opt-in’ provision, which greatly increased the list of registered donors by targeting the status quo bias. Similarly, in Singapore—known for a number of innovations in governance—providing the average electricity usage of the locality on the back of bills has nudged households to think about their own energy consumption, driving them towards reducing it to the average levels, an example of the groupthink effect. Copenhagen’s experiment of using green footsteps to lead to trash bins helped reduce littering by 46%.In the field of tax collection, nudge has helped boost revenues for cash-strapped governments. For instance, in Singapore, printing tax bills on the pink paper typically used for debt collection led to an improvement in the prompt payment rate of between three to five percentage points.
When considering India’s perspective, the behaviour change that will bring in social change, which in turn, will help India transit to a $5 trillion economy by 2024-25. Programmes such as Swachh Bharat Mission, Jan Dhan Yojana and Beti Bachao Beti Padhao, provide testimony to the potential for behavioural change in India.
A key principle of behavioural economics is that while people’s behaviour is influenced significantly by social norms, understanding the drivers of these social norms can enable change. In India, where social and religious norms play such a dominant role in influencing behaviour; behavioural economics can, therefore, provide a valuable instrument for change. Many Indian schemes that employ insights from behavioural economics have met with success. For example: The Swachh Bharat Mission (SBM) and the Beti Bachao, Beti Padhao (BBBP)scheme, Give it up (LPG subsidy).
In India behavioural science can be applied in many streams ,for instance in social norms, Efforts made in Bihar, to improve the quality of health-care service delivery by front-line workers takes into account popular ‘rituals’, like keeping a baby away from the ground in a cot (palna), or marking decorations around her hearth (chulah), for transmitting messages that are culturally acceptable
Behavioural science can be applied to large-scale programmes. The very nature of the science being imbued in a social and cultural context enables it to generate effective and sustained results to public service programme. Research is going on in Tamil Nadu and Bihar to analyse core social motivators for open defecation and related behaviours with culturally appropriate social measures to convert toilet usage into a sustained habit
Behavioural economics can be applied to find solutions to avoidable self-control problems. For instance, farmers face enormous financial distress before the harvest season because of which they borrow large sums of money. If farmers spend more judiciously in the post-harvest season or have access to commitment savings accounts, this would solve the self-control problem.
Interventions that are designed using this science can reduce the intent-to-action gap. There are a plethora of tools like defaults, reminders, prompts, and incentives that can reduce poor adherence and increase compliance for sustained impact throughout the life of an intervention .A good example of this is Kilkari, a mobile service by the government that delivers free, weekly and time-appropriate audio messages about pregnancy, childbirth and childcare directly to families’ mobile phones
Data collected and evaluated from a behavioural insights approach can be used for better management of programme performances. Rigorous evaluation of behaviour is often missed while measuring programme performances, and often this missing data can help explain the limited impact of well-intended government programmes. The impressive work done by the Ministry of Rural Development, on monitoring the implementation of national flagship schemes through DISHA dashboards, can be leveraged for evaluating behavioural change on the ground.
Recently, behavioural economists have discovered the efficacy of a new class of policies called “nudge” policies. Nudge policies gently steer people towards desirable behaviour even while preserving their liberty to choose. According to Nudge theory People need reminders and positive reinforcement to sustain socially desirable behaviour.
In India these Nudge policies can be applied for increasing tax compliance ,Citizens can be sent variations of text messages on how their taxes make a difference to public services. For reducing dropout rate in poor families, Parents can be informed about the average income gains from spending one more year in school for children. To increase savings rate, people can be offered specially designed savings accounts that locked up funds until a self-specified target was met.
Large number of programmes in India didn’t perform to the expected level. for ex: ‘Give It Up’ -LPG subsidy was a comparatively easy policy to be induced by behavioural economics as it requires only a one-time action of affluent households, whereas task is very difficult in case of Beti Bachao, Beti Padao and SBM, as it requires continuous effort to dislodge mind-sets that prevailed for decades. 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 it was effective in Haryana, which also has a very poor sex ratio).
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). Survey held, reducing corruption, discouraging the conspicuous display of wealth and inculcating a sense of pride of being the highest taxpayer in a district (by naming buildings after them) would go a long way in ensuring behavioural change vis-à-vis tax compliance But this could easily lead to a backlash among lower taxpayers, and hurt tax morale disproportionately.
In this scenario, government regulation, taxes and free-market policies should be clubbed with a nudge effect to increase the efficacy of policymaking. If it is implemented diligently than Indian policymaking will be transformed: From BBBP to BADLAV (Beti Aapki Dhan Lakshmi Aur Vijay Lakshmi) From Swachh Bharat to Sundar Bharat From “Give it up” for the LPG subsidy to “Think about the Subsidy” From tax evasion to tax compliance And the dream of New India 2022 can be realised.
Behavioural economics suggests ways how policy makers might restructure environments to facilitate better choices. The focus on errors suggests ways how policy makers can bring changes in society. For example, simply rearranging items that are currently offered within the school encourages children to buy more nutritious items (e.g., placing the fruit at eye level, making choices less convenient by moving soda machine into more distant areas, or requiring student pay cash for desserts and soft drinks). Information should be framed or designed to fit the mental model of recipients; people often ignore those messages which do not conform to their beliefs.
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