Home / Opinion / Columns /  Opinion | The case for a nudge in the right direction

This year’s Economic Survey, the first released by India’s finance ministry with Krishnamurthy Subramanian as chief economic adviser, serves as theme music for the budget due today. In this orchestral exercise, there are high notes and low, but rather few false ones. It rouses just enough optimism to keep gloom at bay. It projects the economy’s growth at 7% this fiscal year, which is a percentage point less than what’s needed to hit the government’s $5 trillion target by 2024-25. For an acceleration of economic activity, it cheers on the “animal spirits" among investors that a stable government is expected to uncork. The investment decline, in its view, will soon be behind us; an easing of credit, coupled with a demand pick-up, will see to that. A virtuous cycle is expected to feed into other variables, and so a consumption revival has been forecast as well. Vicious cycles exist, too, and the Survey speaks of a “constant disequilibrium" that prevails and needs to be turned favourable. On exports, vital to this effort, its outlook is sombre. On the fiscal front, it strikes a realistic chord over the need for big outlays on farm relief in the face of slippery tax collections, but betrays no hint of the deficit slipping out of control.

Any such survey is best read not for specifics, but for what it says of the regime’s economic idealism. Much of what it elaborates has been articulated before, especially Prime Minister Narendra Modi’s welfare agenda. It also delves into such touchy subjects as labour reforms, using state-wise trends to argue against rigid laws that hold expansion and employment back. The done and dusted is all there. But what could act as a conversation starter is its description of data as a “public good"—the “new oil", as it were. In an era that has blurred the division between what’s public and what’s private, after all, the optimal role of the state in the capture and use of big data remains no less hazy. It’s good that a debate is finally astir.

The most striking aspect of the Survey, however, is its embrace of behavioural economics. Arguing that old methods of analysis assume too much rationality on the part of people to explain reality, it proposes the adoption of tools that rely on shifts in behaviour to achieve a set of outcomes. A few cases cited seem like plain and simple persuasion aimed at altering social norms, as in Swachh Bharat’s reproach of open defecation, but others do go beyond clever marketing. The government itself had to overcome an irrational “loss aversion", it says, to overhaul indirect taxes in a way that would spell losses now for gains later; this would be music to the ears of psychologist Daniel Kahneman. The Survey’s theorist of choice, though, is Richard Thaler, a champion of libertarian paternalism. The paternal state’s job is to “nudge" rather than force people to act as desired, done by offering them choices laden with apt incentives. The Survey wants citizens nudged out of tax evasion and other “sins". Inertia is often the chief problem, it argues, and if things are arranged so that doing what’s right is our default position and erring takes “opt-out" effort, then it could be tackled. This message isn’t lost on the government, presumably. Fixing the economy is a must-do, it knows. Opting out would cost it dearly.

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