Economic reform in India has to be about much more than freeing up the market, or getting prices right. Clearly, a horrendously inefficient indirect tax system and inordinately restrictive labour market regulations are two examples where the usual themes are relevant. The GST is a significant step towards improving the tax system (and hopefully will be improved further), while labour laws still await rationalisation. In other cases, however, reform requires careful understanding of the minutiae of formal institutions as well as social norms and new technological possibilities. The challenge of tackling open defecation—now in its fourth year as a national goal—provides one example. The challenge of enabling households to manage their savings and their risks better is a very different problem in its specifics, but shares the complexities of increasing access to and use of toilets. These two examples illustrate the ways in which successful reforms can occur. They make the point that poor implementation is not always the prime culprit for policy failure—deficiencies in policy design can be the root cause.
In the case of toilets, this became a national mission after Dean Spears, Diane Coffey and subsequent researchers pointed out the severe health and development consequences of open defecation. Implementation has been energetic but sometimes misguided. Toilets are built that go unused, or become storage rooms or even kitchens. The design of the waste pits, which is of critical importance, gets neglected in favour of fancier above ground structures. While there is a widespread effort to change perceptions and culture, including raising issues of gender inequality that previously remained hidden, the fundamental issue of ritual pollution associated with cleaning toilets or human waste has not been adequately tackled or incorporated into policy design. The bureaucrats in charge seem confident that goals will be met, and even Bollywood has gotten into the act, but the ground realities suggest that not enough attention has been paid to the complexities of social norms and specific local circumstances in designing policies to reduce and eventually eliminate open defecation. Problems of implementation (including top-down diktats) only compound the problem of poor design (including technology choices as well as incentive mechanisms), and threatening or shaming people into changing their behaviour without accounting for the constraints they face is not a recipe for a durable solution.
Household finance may seem like a far cry from toilets, but there are similarities in the abstract. Indian households do not use financial products enough, in the sense that their aggregate welfare could be higher if they invested their savings differently (less in gold and real estate) and purchased more insurance of various kinds. The report of the committee chaired by Tarun Ramadorai documents this problem. One of the interesting features of the report is careful attention to the complexities in household financial decision-making that are due to the particular social norms of the country. The report considers conventional economic incentives associated with factors such as taxes and transaction costs, but it also urges that households be given the option to purchase customised savings and insurance products, possibly in bundles, to meet needs that are currently not being served by financial services providers. The saving and insurance products listed (quite comprehensively) in the report are not necessarily completely novel, but the discussion of possibilities is clearly sensitive to the social and institutional environment within which households make financial decisions. The report also highlights the idea of “nudging” decision-making by creating basic, pre-qualified products that an individual would receive automatically unless they opt out—this has worked in encouraging retirement savings in industrialised countries, for example.
Of course the analogy between toilets and financial products can only go so far. There are many more possible kinds of financial products than toilets, and the technology of creation and delivery is quite different. The particular social norms that come into play are also different for the two cases. In the household finance case, an official committee has thought carefully about the issues in the case of increasing use of certain financial products by households, both “purely economic” as well as societal. There is also an existing financial services industry that, if pushed by regulation and competition, can innovate more than in the past. In the case of toilets (or rather, the reduction of open defecation), on the other hand, the initial impetus came from academic researchers outside government. The translation of their ideas into policy was oversimplified and did not necessarily emphasise the right kinds of interventions or processes for change. And building rural toilets was not a major activity until the Swachh Bharat Abhiyan came along. There is some similarity between the mass creation of bank accounts for the poor and the helter-skelter building of toilets, but the new bank accounts can still be the gateway for new financial savings and insurance products. Poorly designed toilets without adequate waste pits will be harder to reconstruct.
However, one can end the comparison with a similarity. For toilets and for household finance, successful reform requires deep understanding of individual behaviour and societal constraints, careful design of innovations, and education of potential consumers as well as policy-makers. The last of these may be the most difficult step in both cases.