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 “irrational.”

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.

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.

Let’s 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 “Save More Tomorrow” scheme.

A decade ago in the United Kingdom, employees’ participation in the pension scheme was low as the monthly contribution was considered an expense. The behavioural insights team or “the nudge” units, that function within or alongside the government recommended that the enrolment to the pension scheme to be automatic — 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.

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.

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 ₹3 lakh annually is not taxed, and will receive rebates up to the ₹7 lakh slab. This means, the taxpayer earning up to ₹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. 

The old regime allowed these benefits but the slab for non-taxable annual income was only up to ₹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.

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.