The people inside our markets – part I SPECIAL GUEST BLOG BY NANDAN NILEKANI

Nandan Nilekani, author of Imagining India: Ideas for the New Century, blogs about the rationality of spending.

I recently had a very interesting conversation with the Harvard economist Dr. Sendhil Mullainathan. Economists have recently been looking at how large a role human behaviour and incentives play when it comes to markets, and how people treat money; this is a big part of Sendhil’s work.

Sendhil’s particular interest is in how the poor, especially in rural India, respond to the lending and savings solutions that banks offer them. Sendhil points out to me, that what the financial sector typically does is take the banking solutions they have for the middle class and offer it to the poor. This does not work well because the way the poor earn their incomes is very different from the salaried class. Indian farmers for example, typically earn a chunk of income every six months or so, after harvesting and selling their crops.

For these farmers, paying loans on monthly installments, and saving money becomes an extremely difficult thing to do. ‘Its difficult for people to spend a large amount of money they suddenly receive, very carefully,’ Sendhil points out. Its human nature – people who get rare windfalls of cash find it difficult to plan and spend the money in small amounts. The impulse is then to celebrate - what money they receive they splurge, spending on weddings, family events and ‘conspicuous consumption’. Such consumption is especially important for the poor. As recent work on low income communities points out:

“Conspicuous consumption…. is not an unambiguous signal of personal affluence. It’s a sign of belonging to a relatively poor group. Visible luxury thus serves less to establish the owner’s positive status as affluent than to fend off the negative perception that the owner is poor. ”

As a result, the poor often have little money leftover for monthly expenditures such as schooling for their children, and even food and clothing.

Sendhil and other economists have been trying to devise specific banking solutions, which for example, allow rural workers to pay out big chunks of their loans at the end of the harvesting season. They are also working on other solutions which help them manage their money better, through micro-insurance schemes and savings accounts that allow large deposits and automated monthly payouts.

This new focus on human behavior– and tailoring market solutions accordingly – has become a focus for economists across different fields. They argue that people don’t always keep a complete hold on the real value of an asset when they are buying or selling in a market. The truth of that is pretty apparent when I look at our everyday purchase decisions. My friend hankers after the newest mobile phone or PDA - even though he (and many other likely buyers) feel that a part of the high price comes from the hype, and that ten months later once the next version is out, this one is relatively worthless, both to him and on eBay. We are rarely completely rational in our purchases — whether that’s a house, the latest gizmo, or a car loan.

So new theories around real estate and credit bubbles – which is the root of the global downtown we are now facing– have focused on how people in real life react to regulation, easy credit, and speculative prices in real estate and the stock market, and how the collective mood, rather than any fundamental numbers, works in sending economies into upswings and downturns.

Tying our individual and collective behavior to economic theory is not going to be an exact science. But I am still betting that it will give us some new, powerful insights.

Visit the official site of Imagining India here; designed to serve as a living companion to the book for readers who want to delve deeper into the book’s material and themes, and who want to carry forward the discussion on the ideas that have shaped, and continue to shape India.

Where was the mayor? SPECIAL GUEST BLOG BY NANDAN NILEKANI

Nandan Nilekani, author of Imagining India: Ideas for the New Century, blogs about the attacks in Mumbai.

Where was the mayor?
December 14th, 2008

There was a very good reason for Rudolph Giuliani to run for the Republican Presidential nomination in 2008 – the formidable reputation in crisis management that the former New York mayor had gained after the 9/11 attacks struck the city. He was photographed at Ground Zero immediately after the planes mowed into the Twin Towers, and was a prominent presence on the airwaves in the days after. He came through as decisive and in complete charge of the city’s response to the terrorist attack; in fact, criticism later converged on whether his presence influenced decisions too much, rather than not enough.

But in Mumbai after 26/11, all we received from our mayor was deafening silence.

The lack of comment or reaction was probably expected. I doubt many in Mumbai even know who the mayor of the city is – it’s a largely ceremonial post. There was no powerful official representing Mumbai’s city administration simply because the administration has no power to speak of. The responses in the immediate aftermath of the attacks – orders to the police and military, evacuation operations – flowed from the state and central governments. It was the state, central and defence officials who seemed to be in charge. An entire tier of government at the local level appeared non-existent.

This had huge repercussions in the speed and efficiency with which Mumbai responded to the attacks. The city’s police were ill-equipped for any sort of rapid response. The NSG commandos who cleared the hotels had to be flown in from Delhi – and after their arrival in Mumbai, had to wait for hours to be transported from the airport.

In a crisis, the city was thus left helpless, its institutions frozen in place. The power of city administrations has in fact, been deliberately hollowed out since independence, as state governments superseded city authority and co-opted its power. The decline of the Indian city took a decisive turn after the battle over Bombay in the 1950s, when states were being formed according to linguistic boundaries. Bombay presented a puzzle to the Indian government – while it lay in the heart of Maharashtra, it had Gujarati as well as Marathi residents, and vast numbers of other language communities. Nehru proposed at a point that Bombay become a separate, bilingual area, but the rioting and protests that ensued forced him to back down, and the city became an unequivocal part of Maharashtra. Since then, our cities have been passive and subordinate to the state governments. The bulk of city taxes are collected by the state and central governments and administration is dominated by state run agencies. And with local authorities powerless and unaccountable to citizens, city infrastructure has neared collapse.

The disadvantages of weak and ineffectual city governance become most stark in these times of disaster. The Mumbai floods in 2005 saw civilians far more present in rescue and rehabilitation operations than civic agencies. When calamity hits, the lack of local power and the authority to respond instantly, means that such events are far more catastrophic than they need to be. The twin challenges of climate change and terror are therefore only going to get exacerbated.

The Indian city has long been exiled from our collective imagination. The romance of the ‘village republic’ for India’s politicians and the strong association of the city with the British Imperial Raj doomed the city in Independent India. Gandhi said, ‘I regard the growth of cities as an evil thing’ and for Nehru the city of New Delhi was ‘un-Indian’. Cities were barely mentioned in the Indian Constitution, and were constitutional orphans for over four decades, passed over in favour of state and central government. It was only in 1992, that the Narasimha Rao government passed the 73rd and 74th amendments, which mandated more power to local bodies in cities and villages. Even these amendments were meant to fulfil Rajiv Gandhi’s dream of the Panchayat Raj and village power - city governments were an afterthought.

But these changes, and the powers that the amendments offer, have largely remained on paper – states have been reluctant to cede powers of taxation and control over their cities. The possibility of competition from the grassroots has made state political parties wary of an ‘hour glass’ effect, of being squeezed in the middle between a strong centre and powerful cities. And no state Chief Minister wants to let go the money and patronage that comes from controlling urban land.

But there is some pressure for change. In the years since independence, it was easy for Indian governments at both the state and the centre to dismiss urban India as somehow ‘inauthentic’, and not as legitimate or representative as the rural country. Even today the former CM of Karnataka HD Kumaraswamy justifies protests about Bangalore’s school children reaching home 5 hours late due to his party rally as the outpouring of an ‘effete’ IT/BPO crowd, and the BJP spokesperson Mukhtar Naqvi dismisses ‘women with lipstick’ as somehow not eligible to protest.

But as the spontaneous outpourings in our cities over the terror tragedy has shown, there is change in the air. As India’s urban population steadily grows they will demand more local empowerment. And the implementation of the Delimitation Commission’s recommendations will increase urban representatives in the state legislature reversed this marginalising of urban India. But these are small steps, and crises like the one we just witnessed shows how urgent empowering our city governments has become.

We cannot keep our cities – the centres of our economic growth, innovation and where we are most able to move beyond our caste and our past – weakened and marginal in our politics. This imbalance has led to the decline we can see in every Indian city, the apathy made concrete in our crumbling roads, massive encroachments, and our chaotic, unplanned growth. Without local governments that answer directly to their citizens, urban India will face the threat of being mauled again when the next crisis hits.

Visit the official site of Imagining India here; designed to serve as a living companion to the book for readers who want to delve deeper into the book’s material and themes, and who want to carry forward the discussion on the ideas that have shaped, and continue to shape India.