Rahul Gandhi’s Freebie Politics and the Zero Price Effect

Rahul Gandhi has announced that if Congress is voted to power, his government will ensure Rs 72,000 a year for the poorest of India.

Weeks before the national election, Rahul Gandhi has announced what he calls a “historic” minimum income guarantee scheme assuring Rs. 72,000 a year for India’s poorest families if the Congress is voted back to power. “The final assault on poverty has begun,” he said of the scheme named Nyuntam Aay Yojana (NYAY) by his sister Priyanka Gandhi Vadra at a recent party conclave in Gujarat.

The money will be directly transferred to the bank accounts of 20 per cent of the poorest in the country. The scheme, said the Congress president, would lift five crore families or 25 crore people out of poverty.

He explained that any family earning less than Rs. 12,000 a month will receive Rs. 6,000 every month in its bank account.

That is a pretty sweet deal for some.  The problem is that it does not make any economic sense to anyone.  Just think through this – India’s entire GDP is Rs 188 lac crores.  Budget for Defense is Rs 3 lac crores, for education that decides the future of India, is Rs 1 lac crore.  The entire RBI reserves are Rs 10 lac crore.

The outlay for this scheme comes out to Rs 3.6 lac crore, which is little over 50% of the entire tax revenues in India!

Rahul Gandhi's Minimum Income guarantee scheme is an economic disaster. Its not about economics, but marketing. Its called Zero Price Effect - read and reflect. Click To Tweet

So, why would a party with a celebrated economist like Dr. Manmohan Singh even indulge in the ignominy of talking about such economic rubbish?

Apparently, it has more to do with marketing than economics.

Zero Price Effect – Drug effect of Freebies

There is a phenomenon called – the Zero Price Effect.  In their paper – Zero as a special price: The true value of free products (Zero price effect), Kristina Shampan’er and Dan Ariely wrote about how Zero is indeed a special price which clouds people’s judgments.

We test this proposal by contrasting demand for two products across conditions that maintain the price difference between the goods, but vary the prices such that the cheaper good in the set is priced at either a low positive or zero price. In contrast with a standard cost–benefit perspective, in the zero-price condition, dramatically more participants choose the cheaper option, whereas dramatically fewer participants choose the more expensive option. Thus, people appear to act as if zero pricing of a good not only decreases its cost, but also adds to its benefits.

A similar study was also done by Ahmed Driouchi, Youssef Chetioui, & Meryem Baddou of the Institute of Economic Analysis & Prospective Studies (IEAPS), Al Akhawayn University, in Morocco (MPRA_paper_32352).  Here is part of the abstract of what they found.

The results suggest that more participants choose the cheaper option, whereas fewer participants choose the more expensive one. People act as if zero pricing is a special price, as suggested by the zero price model.

In this article, Shampanier explains – that even when they rationally would have selected other options, the lure of free clouds judgment.

“When people are offered something for free, they have this extreme positive reaction that clouds their judgment,” Shampanier says. “They are ready to forgo options that are, rationally speaking, better for them.”

So, free stuff announcements are like narcotics or rationality numbing substances.  They cloud rational judgment of the targeted populations.

In fact, these researchers first thought that this maybe because the people studied were too lazy and did not want to reach out to their wallet to even take out one penny.  But the truth was something different.  When the experiment was performed with just photos of chocolates even when they did not have to shell out any money and only imagination was involved, the people always went for the free Hershey’s kisses.  That is when Shampanier remarked:

“It’s not about having to reach out for the money, it is this affective reaction that people have,”

The introduction of free is a special event and it can impact the way people start viewing the options.

But when free gets introduced into the picture, our heuristics kind of short circuit. “There is zero downside to this,” our heuristics say. “So, might as well chose it!”

That is where Rahul Gandhi’s announcement is coming from.

The impact of this announcement will be like a drug and cloud judgment of the poor.

After all, over the years, the entire Tamil Nadu politics has been dependent on this lure of the free for the poor.  The poor are still poor and economy has suffered tremendously.  Just that over the years, they have been given a lot of freebies for their votes.  But their lot has never improved!

In 2017, a Delhi resident had appealed to the Delhi High Court to give direction to the ECI to restrain all political parties from promising free stuff during the Assembly elections in February and March that year.

Well, in a 2013 verdict, the Indian Supreme Court had remarked:

“Although, the law is obvious that the promises in the election manifesto cannot be construed as ‘corrupt practice’ under Section 123 of Representation of People’s (RP) Act, the reality cannot be ruled out that distribution of freebies of any kind, undoubtedly, influences all people. It shakes the root of free and fair elections to a large degree,”

You see, there is a problem on how to enforce such acts and announcements by the political parties.

And, this is what the most corrupt parties in any democracy do.  They play with the judgment of the poor and use that to get the grip to ultimately run the whole economy into the ground.  It is a politics of poverty.  Poverty is a tool to get to the power.  And, poor are always kept poor, for they ensure the success of the freebie politics!

To understand this in the most stark manner – read these travelogues (One, two, three, four) of yours truly from Caracas, Venezuela way back in 2004.  It was still a somewhat vibrant economy with a lot of economic life.

And, look at the situation there now.

This is what happens when politicians use poverty as a tool for state power.