In the past,
many posts have sought to demystify economics in terms of its applications to
real life. Economics at subconscious level and at conscious and deliberate
level does affect human decision making as illustrated numerous occasions in
the past posts. The current post too is a continuation of the same and seeks to
take further the real life applications of economics. In this post, there would
be discussion on government interventions and economic decision making of the
agents. Many a times the government has to intervene to direct the micro agent behaviour
into a trajectory it desires.
The finance
minister has announced a special LTC cash voucher reimbursement scheme for the
block 2018-21. Under the scheme, the employees can opt for this scheme in lieu
of LTC for the said block. This might make sense since those employees who have
not availed of the LTC might opt for this scheme. Many employees would not
perhaps avail the concession owing to the current situation. In some ways, it
might hurt the tourism industry since the employees used LTC to plan their
vacation of sorts. The employees would get a tax free payment of fares in three
flat rate slabs as per class of entitlement. They would also get leave
encashment of 10 days. There is of course a rider. The employees who avail of
this scheme must purchase goods worth the amount from GST registered vendor
before March 2021. The goods also must attract a GST of minimum 12%. The payment
must be through a digital mode. While the merits or otherwise can be debated,
it perhaps seeks to use the behavioural economics concept of ‘Nudge’ to
purchase the goods. The government is essentially coaxing the people to
purchase goods by designing an incentive mechanism that ostensibly makes it higher
benefits relative to costs.
There is of
course many a times a moral guilt of not buying consumer goods or luxuries on
the presumption that cash might be better used for other purposes. When government
suggests this scheme, the employees who otherwise were not planning to avail
the concession would opt for this and choose to purchase the goods that they
desire at home. The minimum GST rate is perhaps designed to ensure the
employees would not purchase the essentials and instead focus on consumer
durables, electronics, automobiles etc. the consumers through heuristics and biases
are prone to certain choices. The government wants to change the direction of
the choices through an intervention.
Apart from the
prospective increase in consumer demand thus boosting the GDP growth rate which
is in the negative zone following the long lockdown, it also aims to boost the
GST collections. The government wants to remain fiscally conservative. The fiscal
conservatism is not possible in the absence of buoyant tax collections. This can
happen when the demand goes up. The uncertain environment is resulting in
consumption declining or stagnant. The marginal propensity to consume is lower
than the marginal propensity to save. The government intervention must be to
ensure the marginal propensity to consumer must pick up. This seems to be one
of the ways. While in absolute terms it might not yield significant revenues
but might go some way in restoring demand in the current financial year without
impacting the fiscal deficit. This along with the special festival advance
which is interest free are expected to increase the demand and thus the GST
collections easing some pressure on government spending. The festival advance too reflects a similar
principle as above. It enables the people to buy goods for the upcoming
festivals without feeling the guilt of using the money for frivolous purposes. Yet
the fact it is an advance and not an allowance per se, one must be careful in watching
its impact. It might not yield the same impact as the other scheme. But the
underlying principle remains the same.
Similar attempts
have been undertaken in other countries too. In Britain, there have been
massive discounts, tax cuts and vouchers for eating in restaurants. The objective
was to encourage people to patronize restaurants and thus boost their demand,
which otherwise was sluggish thanks to the lockdown. There is of course the
autonomous element of propensity to self-protect which might deter the scheme. As
it is, the scheme is being criticised for the incidence of the second wave of
corona infections if one might term it so. Yet, irrespective of its alleged
consequences, the idea remains the same. There is a central nudge in making
customers move to the intended trajectory. In economics, it is a classic
application of what is termed as income and substitution effect. When the price
of one good in the basket changes, in this context reduces, the basket itself
gets altered. This is due to not because of change in prices per se but due to
the change in real income. The increase in real income following discount and
tax offers to eating in restaurants would alter the consumer preferences of
eating out versus eating at homes. Of course, in this context, the price purely
could not have been the explicit one but also the added risk of contracting the
corona infection which would eat into medical expenses and the mental trauma
among other things. Yet, the people are unlikely to be swayed by the invisible
rather than the visible. Therefore, the government plan was to build on the
visible while seeking to hide the invisible. This is an attempt to use the
heuristics which often goes by the information what is available to us.
As we have
observed in these examples, economics plays a critical role in shaping human behaviour
and thus the foundations for the decision making of the economic agent. In
absence of private incentives, the government has to intervene and create the
incentives. Yet these examples are merely illustrations to denote the concept. Economics is quite vast and needs elaborate
treatment to demystify the various dynamics associated with it. The current
post is a mere continuation of the past posts and in the subsequent posts, more
topics will be taken up for discussion.
Comments
Post a Comment