Demonetization
has come as a shock to everybody. The main target of this shock therapy were
people dealing with black money and terrorism, nevertheless, it has affected
everybody. By and large people have questioned the implementation but very few
have criticized the policy and its intention. However, I believe that it will
have large behavioral consequences that could have a positive welfare impact.
There is no doubt that such a drastic move is pushing people, primarily those
in the informal economy, to open bank accounts and actively use them. This
might seem trivial and transactional but it has behavioral consequences.
Opening and actively using a bank account could potentially lead to behavioral
shifts towards decline in wasteful expenditure and increase in savings.
Research in behavioral economics has shown that most of us suffer from not
taking the right (rational) actions even when we know what is the right thing
to do (for example, we keep postponing our decisions to exercise), economist
call this time inconsistent behavior. Savings behavior is also subjected to
such time inconsistency. To be able to save requires discipline to curtail our present
consumption, and save more for tomorrow. Research has also shown that such
behavioral issues play an instrumental role in in explaining why people are
poor. Fundamentally poor people lack the instruments and the discipline to save.
One possible solution to this is to “nudge” people to take the right action,
however, demonetization has gone one step ahead to “compel” people to open a
bank account and actively use them for savings and expenditure.
Prior to demonetization
I had conducted a survey of new age “taxi aggregators” drivers to understand why
they were giving up a regular job at traditional taxi companies and joining these
new companies for variable income. Though most of them were joining to make
more money but they also valued the payment policy of these new companies. The
drivers in these new companies are not paid in cash but every week money is deposited
in their bank account. They said that this led to reductions in wasteful
expenditure and also building a bank balance became a matter of pride. The
drivers placed a high value on this and credited the new age companies for inculcating
this discipline. Many of them believed that they were saving lot more than
before when they were working in traditional taxi companies which paid in cash.
What this highlights is that if informal workers were to rely more on banks as
a method of receiving their wages and making payments, it then has the
potential to resolve behavioral issues related to savings and consumption.
Unfortunately, behavioral issues cannot be resolved easily, sometimes coercion
is required to do the right thing.
