In the presence
of information asymmetry, it is difficult to gauge the intentions of the
opposing party. The only way to detect any possible moves is through a careful
observations of the signals they are likely to send. Thus signalling is of critical
import in economics. In the past posts, the role of signalling has been
discussed in certain contexts. The current post would seek to take it forward.
Recently there was a communication from the RBI Governor to the players in the
debt market be competitive and not combative to achieve the best results. There
is a tendency in the section of debt players to act pro-cyclically in tune with
RBI whereas the others might act counter-cyclically to the RBI stance. This often
negates the RBI purpose and thus monetary transmission might not achieve the
desired results. This of course in some ways reflects the tragedy of commons
often discussed in economics literature but owes its origin to biology.
Yet in
discussion on signalling, two dimensions arise. The first obviously is the
nature of goods and secondly is the incentives that drive or govern a certain
set of behaviour. Public goods are often susceptible to free riding. For instance,
the national security or law enforcement or justice is available to all
irrespective of whether they pay taxes or not. Common property resources are
subject to over exploitation. The pastures are rivalrous beyond a point but
given their non-excludable nature makes them open for farmers to over graze
their cows thus destroying the pastures. Something similar is observed for
forests. The private goods are often talked about as a solution to overcome the
problems faced above but face the tragedy of anti-commons-too much of ownership
creating under-utilization. This is something visible in manufacturing drugs
due to the numerous patents being held on raw materials and processes. The club
goods too face a similar proposition.
In some
quarters, there has been a discussion going on with reference to the PM Modi’s
call for Jan Bhagidari to eliminate the current corona pandemic as also in
extension to solve the Indian problems. Wearing masks often posits a problem of
Prisoner’s Dilemma. In fact if everyone wears a mask, collectively the society is
better off. Yet wearing masks pose certain discomfort. Therefore if only does
not wear a mask while everyone else wears, they are at an advantage. Since all
others are wearing the masks, the possibility for getting infected from others
is very low or negligible. Neither is the possibility of transmitting to
others. But everybody will think in a same way. This will result in everybody
not wearing the masks and results in collectively worse off. This is manifested
in increased infections and increased severity of infections. The outcome
therefore to avoid the prisoner’s dilemma is to make it mandatory, a
centralized intervention.
There is some
proposal being floated to involve Jan Bhagidari in managing the welfare of
families living under below poverty line. It is being touted perhaps as sort of
redistribution of wealth and income. It entails the rich or those with an
annual income above a certain level maybe Rs. 10 lakhs per annum or so to adopt
a family living under the poverty line and subsidize it with a certain amount
let us assume some Rs.60,000 per year or so. The plan believes that when people
transfer the money to these families, these families will use it for
consumption thus boosting it. There is a further suggestion to offer tax exemptions
on the amount thus transferred subject to certain limits. No doubt this sounds
well in theory. But as with many other things, this might have its own
unintended consequences.
There is an
adage, teach a man how to fish rather than giving him a fish. What this
proposal sounds is giving a fish albeit for a temporary purpose. But rarely
does in India, schemes have an expiry date. Once they are entrenched they are
difficult to eliminate. Furthermore, the rich who are expected to transfer the
money might not necessarily participate. They might even create fictitious
accounts to transfer money. While these can be eliminated to significant extent
through Aadhar or other tools, there is a possibility of these measures becoming
a tax avoidance tools than any genuine help to the poor. The government might
signal its intentions through tax exemptions, thus an opportunity to respond to
incentives but each such measure has to be evaluated against the potential costs.
Agricultural income tax was exempt but the way it has turned out has exposed
the fault lines in the underbelly of the economic thinking. Each measure is a
path towards tax avoidance or rather tax evasion.
Yet there could
be an alternative way of helping the poor. Those families below poverty line
must be encouraged to take up a job or begin a business, thus a path of
entrepreneurship. The path might lie in agricultural sector or non-agricultural
sector. In case they choose to follow a path of agriculture, then the rich let
us say those have income of above Rs. 10 lakh or so might be encouraged to lend
around let us assume Rs. 6000 per month or so. This money could be given to
them monthly for a certain finite time and be eligible for tax exemptions for
the said period. Within the time period set, the families might use this money
as seed capital or for working capital or if they have alternate sources use
the same to supplement the family expenses. Using this as working capital would
enable them concentrate on business without worrying about the family expenses.
The amount thus lent as working capital might be repaid back to the lender
families at certain future point of time. Alternatively, the lender family might
choose to reinvest the amount in the business thus creating a rotation. The amount
being lent will stop if the recipient family does not follow a path of
entrepreneurship within a said period of time. This serves two purposes. While tax
exemptions will give an incentive for families to lend or donate, the recipient
families are encouraged to set up business which will encourage self-employment
and entrepreneurship and job creation. This could emerge as the P2P model for
Mudra and job creation. Rather than treating it as charity, this might be a
good idea to convert into lending for working capital on a peer to peer model. This
might be worth exploring.
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