Creating operational and policy interventions to restart economic activity in a phased manner

The pandemic posits a trade-off between public health risk and an economic collapse. This trade-off is particularly prominent in India, primarily because we are a densely populated country with a large chunk of its labour force comprising daily wage workers, and secondly the manufacturing sector is characterized by MSMEs which are vulnerable to liquidity shocks and are a big vessel of employment.  The policy response to COVID in India has been severe relative to international comparators, both in terms of intensity and duration. Barring essential services, all commercial, industrial, travel, religious and cultural activity had been shut down. The economy is now gradually opening up, with unanswered questions staring it in the face. What would be the economic impact of social distancing measures and what measures are needed to put India back on the path of economic recovery? To cushion the economic and financial fallout, the centre and state governments swiftly rolled out several schemes, including direct bank transfers (DBT), pension reforms, monetary injections, and debt moratoriums. The severity of the ensuing economic contraction will be dependent on the health policy response and on the efficacy of the fiscal and monetary policy measures undertaken by the Governments and RBI. 

The objectives of this initiative are: 

• Evaluate effectiveness of such public policies and financial reforms – understand which measures work best and which don’t
• Study how JAM (Jan Dhan—Aadhaar-Mobile Internet) trinity can be leveraged to maximise effectiveness of the policy response
• Examine how fintech may be leveraged to soften the costs imposed by the economic slowdown on the vulnerable population

Projects under this topic are:

Project 1: Understanding SME’s Finances

Faculty: Shashwat Alok, Shiv Dixit & Prasanna Tantri 

Project Brief: The Small and Medium Enterprises (SMEs) play an extremely important role in the  Indian economy:  they  contribute  45%  of  the  industrial  output;  40%  of  the  overall  merchandise  exports;  and employ more than 60 million people. Despite their importance to the economy, it is well known that SMEs suffer credit constraints. This situation can be loosely described as a lack of access to credit despite there  being  profitable  projects.  The  recently  announced  “Atmanirbhar  Bharat”  package  of  the government of India has made solving access to credit issues faced by SMEs as its number one priority. To resolve related credit-access problems of SMEs, we must first understand how SMEs are financed. To our knowledge, there is no database that provides authoritative information about how SMEs are financed in India. This project is an attempt to fill this knowledge gap. The exercise will have three phases. The first phase will have the team (consisting of faculty, researchers, and students) working with a survey agency and conducting surveys of SMEs in Telangana and Punjab. We will also work with an SME association. The work will involve designing initial and final survey documents, deciding the working arrangement with the survey agency, monitoring the execution, tabulating the data, and finally drawing inferences wherever possible. The second phase will involve a more in-depth analysis of the data from the survey. The findings may lead to a case study or a research paper. Finally, the last phase will involve experiments. The questions for experiments will be based on the findings of the first two phases.

Project 2: Optimal Composition of Public Spending and Shock Dependence

Faculty: Shashwat Alok, Shiv Dixit & Prasanna Tantri

Project Brief: There is substantial variation across Indian states in their fiscal response to COVID-19. This  project  aims  to  study  which  interventions  have  been  successful  in  terms  of  cost-effectiveness  and economic stimulus. Do direct cash transfers work best, or should we also have a food distribution system? Our central hypothesis is that the optimal composition of government spending depends on whether the shock is demand-or supply-driven. In a demand-driven recession, cash transfers may be preferable since they allow households the flexibility to spend on the goods that they need most, circumventing the perils of paternalism. On the other hand, if the downturn stems from obstacles in the supply chain, then in-kind transfers may be preferable.

The project will pursue a three-step strategy. The first step will document the  exposure to demand/supply shocks using variation in the intensity of lockdowns across Indian districts, and the various types of fiscal interventions implemented by the centre and local governments. Second, for each location, we will identify if demand or supply shocks dominate by examining movements in quantitates and prices of standardized  commodities. The idea is  that  demand  shocks  cause  output  and  prices  to  move  in  the  same direction, while supply shocks cause these variables to move in opposite directions. Third, we will estimate the impact of fiscal interventions on economic outcomes by comparing the experiences of individuals that are more exposed to a particular type of shock with those who are less exposed. 

Project 3: Consumer Behaviour on Fintech Platforms

Faculty: Shashwat Alok, Shiv Dixit & Prasanna Tantri

Project Brief: The Jan Dhan Yojana program provided a much-needed push towards financial inclusion in India. However, despite the massive number of accounts being opened, usage remains low for a significant fraction of the accounts. More broadly, while the adoption of financial technology has been increasing, there is still a large fraction of the Indian population who operate outside the formal financial system. Quite interestingly, fintech adoption, as measured by the number of downloads of financial apps, has seen a significant surge in the aftermath of the Covid-19 induced lockdown around the world, and especially so in many developing economies. Thus, going forward, it is even more important to understand how fintech platforms can be leveraged to improve the lives of the marginalized population, while at the same time ensuring that underlying platforms remain viable. In this set of projects, we plan to work with a fintech transaction platform (niki.ai) to gain insights into consumer behavior: determinants of usage, frequency of usage, barriers to fintech adoption, etc. Niki is an AI-based personal assistant that enables users to make commercial and bill payment transactions by simple conversations in the user's native tongue.

The project will try and address the below mentioned questions:

•  What would be the traits of early adopters?
• Once users do their first digital transaction, how comfortable/open would they be to moving to other digital platforms? Would the switching cost for them be high?
• What would help break the mental barrier that they have against the adoption of digital transaction platforms? What sort of nudge will push them over the line to try digital transactions? Are there any strong predictors that could be used to classify a given user as a target group vs. nonTarget group user if we don't know information like income, strata, etc.
• Post Covid-19, how has the behavior of families who have started adopting to online services? Who's driving this behavior (e.g., children of the family?), and who's responsible/involved for decision making?
•  What kind of services would these users want to avail digitally/ online (what is digital/online perception in their mind? What all do they think can be done online / they would want to do online?)
•  What sort of promotions would work for the target group?
• Has convenience-driven v/s savings driven?