In her speech to the students of Shri Ram College of Commerce (SRCC), New Delhi, last week, finance minister Nirmala Sitharaman brought up Richard Thaler\u2019s nudge theory while speaking about the economic policies of the government. In particular, she highlighted the \u2018Beti Bachao Beti Padhao\u2019 scheme, the prime minister\u2019s request to give up LPG subsidies, and loan schemes for women to start businesses, as examples of nudge theory. <\/p>\n Thaler, an American, was awarded the Nobel for Economics in 2017. His field of study, behavioural economics, is a relatively new one and is a crossover of economics and psychology to better predict how people, companies, governments, and other stakeholders whom economists collectively refer to as \u201ceconomic agents\u201d make decisions.<\/p>\n Traditionally, economic agents are assumed to make rational choices with all the required information they need to make decisions. However, the reality is far from this. For example, a consumer or a producer does not possess full information about a product or the market. Behavioural economists draw attention to the existence of biases in decision-making which make our choices inherently \u201cirrational.\u201d<\/p>\n A policy that pushes people towards making better decisions, bypassing their biases, and making people behave in a specific way without depriving them of their freedom of choice through either economic incentive or penalty, is called a nudge. The nudge should be designed in a way that is not expensive to administer and should not make major alterations to the existing choices or incentives available to the people.<\/p>\n In 2019, the economic survey of India placed nudging in a policy spectrum that ranged from no government intervention to full-blown mandate. Beti Bachao and Aadhaar were examples of nudges in this spectrum. For something to be called a nudge, it should have a low cost of implementation and involve only a simple rearrangement in benefits. It should not include fines, taxes, subsidies, or direct mandates.<\/p>\n Let\u2019s illustrate this with an example offered by Thaler in his lecture to the Stockholm University on receiving the Nobel prize in December 2017. This was later revised and published in the American Economic Review. Thaler refers to his paper on automatic enrolment into pension schemes called the \u201cSave More Tomorrow\u201d scheme.<\/p>\n A decade ago in the United Kingdom, employees\u2019 participation in the pension scheme was low as the monthly contribution was considered an expense. The behavioural insights team or \u201cthe nudge\u201d units, that function within or alongside the government recommended that the enrolment to the pension scheme to be automatic \u2014 the employees could opt out but the default would be to stay within the pension scheme. This was one of the many tweaks that were made in the policy experiment. As a result, in the hotels and restaurant businesses, participation rates in the pension scheme increased to 50% in 2022 from a mere 5% a decade ago.<\/p>\n However, by comparison, the schemes Sitharaman mentioned are direct interventions with economic incentives. Take the Pradhan Mantri Jan Dhan Yojana (PMJDY), for example: it mandatorily linked Aadhaar to bank accounts and actively intervened to make bank accounts the only medium to receive cash payments. A nudge would have been to push people to the banking system, without ruling out the possibility of receiving cash handed over to the beneficiary directly.<\/p>\n A more accurate example of a nudge is the introduction of the new tax regime. The regime was introduced in 2020. In the new regime, a taxpayer earning up to \u20b9<\/span>3 lakh annually is not taxed, and will receive rebates up to the \u20b9<\/span>7 lakh slab. This means, the taxpayer earning up to \u20b9<\/span>7 lakh on claiming the rebate would not have to pay taxes at all. The new system, however, did away with 70 tax benefits that are in the old scheme.\u00a0<\/p>\n The old regime allowed these benefits but the slab for non-taxable annual income was only up to \u20b9<\/span>2.5 lakh. The finance minister announced the new tax regime as the default option in the Union Budget 2023-24 and gave the option of reverting to the old regime if the taxpayer wished to. This arrangement was made to nudge the taxpayers to opt for the new scheme. The effectiveness of this move is yet to be seen.<\/p>\n It is interesting to note that while tweaking the tax regime is the best example of nudge theory in Indian policy, it found no mention in her speech.<\/p>\n<\/p><\/div>\n![\"Last](\"https:\/\/www.hindustantimes.com\/ht-img\/img\/2023\/10\/10\/400x225\/Finance-minister-Nirmala-Sitharaman-at-the-GST-Cou_1696704065893_1696923760441.jpg\" "\\"Last")
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