Mudit Kapoor, Visiting Fellow at IDFC Institute, writes on the large behavioural consquences of demonitisation and how they could create a positive welfare impact. Excerpts below:
"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 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."
Read the whole blog post here.