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The Insolvency and Bankruptcy Code, for instance, has forced a change in the mindset of both the borrower and the lender. (Mint)
The Insolvency and Bankruptcy Code, for instance, has forced a change in the mindset of both the borrower and the lender. (Mint)

Opinion | Richard Thaler and Narendra Modi’s India

Behavioural economics sets the path for India to transit to a rules-based regime

Last week, the Union finance ministry presented the annual Economic Survey or the report card on the economy to Parliament. Keeping with tradition, this year’s Survey too, guided by a new author, Krishnamurthy Subramanian, provided a unique insight into a rapidly transforming India: behavioural change.

Taking up from the work of Richard Thaler, the scholar from Chicago Booth School of Business who won the Nobel Prize for his seminal work on behavioural economics, the must-read second chapter in the Survey—Leveraging the Behavioural Economics of Nudge—provides the theoretical construct to understand the behavioural changes (such as Swachh Bharat has done to the idea of cleanliness) that the country has undergone over the last five years. At the least readers will come away informed about the contribution of Thaler to a field that is now finding rapid currency among policy planners across the world.

At its core, what behavioural economics tells us is that people are not always rational and unbiased individuals. As a result, their actions are influenced by the way the choices are presented to them. As the Economic Survey says, “Nudge policies gently steer people towards desirable behaviour even while preserving their liberty to choose." This is a pre-condition if India is to truly aspire to transit to a rules-based regime.

Let us take for example the Insolvency and Bankruptcy Code (IBC) of India—in my view, one of the most lasting legacies of the first tenure of the National Democratic Alliance (NDA). Till its introduction, the credit culture within the country, especially for errant corporates, was one of borrow on time but either delay or default when it came to repayment—exactly the reason for the bad debt burden which has crippled banks and cramped economic growth. The IBC changed all this. It put defaulting promoters on notice and has moved swiftly to eject them, including some legendary Indian corporates, from the boards of companies. Another matter that the IBC did not anticipate is the kind of pushback from promoters who are pursuing every legal ruse to hang on to their companies. As a result, the bankruptcy code has not been able to achieve the kind of change that was desired, something that critics (including the professional pessimists that Prime Minister Narendra Modi alluded to on Saturday in his public address in Varanasi) continue to harp about.

However, what most people forget is that the IBC has forced a change in the mindset of both the borrower and the lender, who in the past connived with politicians to ignore basic norms and rules to lend money to errant promoters, a phenomenon described as crony capitalism. Both are now more circumspect, the first step towards changing the credit culture in the country.

The Survey also cites the example of the Swachh Bharat campaign and its salutary effect on health outcomes, particularly with respect to malaria and diarrhoea. This change in the country’s hygiene culture will result in arresting the productivity loss and also fallouts like malnutrition.

Similarly, a slew of tax changes tightening the rules on tax filings (including the roll-out of the goods and services tax) and the much reviled demonetization of high value currencies, have begun to force a behavioural change from tax evasion to tax compliance. The latest exhibition was the special mention about “honest taxpayers" in the interim budget presented by Piyush Goyal and the first budget of the second tenure of NDA by Nirmala Sitharaman. In short, the premium on honesty is being gradually restored.

India has a long way to go because so many of our prevailing mindsets have been around for so long as also the fact that behavioural change is never easy to achieve. This is only natural. However, as the cliché goes, anything well begun is half done.

Anil Padmanabhan is managing editor of Mint and writes every week on the intersection of politics and economics.

Comments are welcome at anil.p@livemint.com

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