Would tweaking a few procedures actually help the country’s economy recover? Maybe the answer lies in field trials
The International Monetary Fund (IMF) and the World Bank have cut down India’s growth forecasts to six per cent for the fiscal year 2019-20, from nearly seven per cent, riding on a weakening domestic demand. Industrial growth shrank 1.1 per cent in August, after a gap of 26 months, reinforcing fears of a slowing economy and deteriorating consumer sentiment. Industrial production, as measured by the Index of Industrial Production (IIP), had grown 4.8 per cent in August last year. Data released by the statistics office showed the April-August factory output growth at 2.4 per cent, well below the 5.3 per cent for the same period in the last fiscal. These numbers paint a rather grim picture of a long winter ahead for the economy of the country. So, is it time to use Randomised Controlled Trials (RCT) to test and/or tweak policies in select pockets to bring out better results?
For the uninitiated, RCTs are most commonly used in the field of medicine to check the impact of a particular chemical concoction on a randomly chosen group of patients with a condition. Two or three sets are “administered” or “not administered” different variations of the drug to see the beneficiary impact on health.
Coming from the creative soil of Kolkata, Nobel laureate Abhijit Banerjee chose to apply a similar model for solving big picture issues at the ground level. The economist and his co-awardees, through their trials, studies and experiments, argue that it is possible to arrive at optimal policy solutions based on empirical evidence, having tested their variables in controlled trials on a small target. This means breaking down macro problems such as poverty, malnutrition or an economic slowdown into smaller packets. Then pockets of focus target groups are subjected to policy trials, allowing faster results and direct solutions. It seems to be opening a host of possibilities for lawmakers and policy formulators, not to forget those who have to implement them.
Coming back to the deepening economic slowdown issues — if we consider this to be the real challenge for India in the short term — it would, with the will of the policy-makers, be possible to allow some controlled trials on select groups for a short period. This would be a test case for boosting demand in the particular micro-pocket of the economy. For example, if the Government wants to increase rural offtake for houses and two-wheelers or even four-wheelers, it can (at least in theory) offer a cashback /interest-free limited equated monthly installment (EMI) or an insurance free, with every loan sanctioned at the much talked about Loan Mela.
A particular pocket can be subjected to this or a variation (either all of the options or some) loan mela bonanza during the festival season, while the other can have plain vanilla bank offers meant for this region and sub-group of customers. The results emerging from this limited trial can throw some long-term solutions to tackling ghosting small-time borrowers and impacting or predicting consumption behaviour. Who knows, some far-reaching insights on the impact of demonetisation and the digital economy can also be found in the side alleys? Yes, it needs an economic scientist to honeycomb tons of data on consumer behaviour, have a clarity of thought and principle to arrive at effective solutions, before being put across the bureaucrat’s desk to be formulated into a meaningful macro policy document.
Herein lies the critique of the now Nobel-awarded proof of breaking big problems into smaller, manageable questions and solving parts, for the “whole matrix”, in short, RCT.
The first being that such experiments reduce the scope of economic uncertainties by eliminating the possibility of manual selection. The second and perhaps more apt (if we were to look at the problem of the economic slowdown) is that small interventions and policy tweaks or a bit of additional benefits with a loan may increase offtake in the short-term and also perk up consumption. But it hasn’t been proven to be of benefit for the larger economy. Perhaps the impact of a large population could be disastrous, which may delay consumption, for want of a better sop or cashback (if you will). Also the question of whether this will ultimately lead to overall prosperity and not really impact the macro monetary decisions of the Government will need hard thinking.
Now, with all this “Freakonomics” possibilities, we jump back to the consumption economy which is fast becoming a Doomsday prediction coming true. The Government is seen taking widespread reforms (not randomised) agenda, giving tax sops and announcing sectoral booster packages but the consumer is reluctant. Is it time for senior policy makers to actually start doing the rounds of the country to see the impact of the fiscal reforms on the ground? Would tweaking a few procedures actually help the economy recover? Maybe the answer lies in field trials.
(The writer is a policy analyst)