Trunk Economics | December 25, 2024
Of gifts, values
and secret Santas
THERE IS A PECULIAR RANDOMNESS ABOUT the timing of a recent policy decision. The Goods and Service Tax (GST) Council, headed by Union Finance Minister Nirmala Sitharaman, on December 21, 2024 clarified that transactions involving vouchers will be treated as neither a supply of goods nor services and, consequently, will not face taxation under the GST framework.
The decision, which is expected to bring much-needed clarity and resolve longstanding disputes surrounding the taxation of gift vouchers, comes during that time of the year when friends, family and colleagues take part in `Secret Santa’—a popular holiday time gift-giving tradition.
The fun element is that people are randomly assigned a gift recipient, implying one has to choose a gift for a person for who you may not much about. It is fun, playful and expected to invoke a sense of camaraderie, particularly among co-workers.
In India, the world’s most populous nation as also one of the most powerful global economic growth engines currently, gifting is deeply embedded in the country’s socio-cultural essence. People exchange gifts during every big festival of every region, and religion—from Diwali, to Eid, to Christmas, to Onam, to Bihu, to Durga Puja. Add to that the tens of thousands of weddings that take place across the country.
Where families exchange offerings and gifts—from gold to consumer goods. Such buying also remains one of the principal trigger points to sustain India’s consumer economy, one of the strongest pillars of the India growth story. TechSci Research, a US-based management consulting and research firm, has valued India’s gifting market at $72.56 billion in 2023.
Assessing the true value of gifts is more complex than the price label. It's unclear how many gifts are actually used for their intended purpose. Gift-givers often rely on incomplete information, guesses, and probabilities to choose a gift, making it difficult to determine the recipient's actual needs.
Deadweight Loss
The significance of gifting—economic, social, cultural and anthropological—is, however, far deeper and nuanced than the excitement (in some cases painful if it is for a person who you don’t particularly like) of buying a gift.
In a 1993 paper, The Deadweight Loss of Christmas, the economist Joel Waldfogel presents evidence that “holiday gift-giving causes deadweight loss, or that recipients generally value the objects they receive as gifts as less than the prices paid by the givers”. Waldfogel’s paper estimated that between a tenth to a third of the value of holiday gifts is destroyed by gift-giving and pegged the deadweight loss of 1992 holiday gift-giving in the US at between $4 billion to $13 billion.
In India, the world’s most populous nation as also one of the most powerful global economic growth engines currently, gifting is deeply embedded in the country’s socio-cultural essence. People exchange gifts during every big festival of every region, and religion—from Diwali, to Eid, to Christmas, to Onam, to Bihu, to Durga Puja. Add to that the tens of thousands of weddings that take place across the country, where families exchange offerings and gifts—from gold to consumer goods.
It would be an interesting and a fascinating exercise to find out the deadweight loss of gifting in India, particularly in the context of those exchanges that take place between people where the gift `giver’ have only limited information about the gift `recipient’s’ requirements in terms of objects that may have some distinct utilitarian value.
For instance, of all the guests who turn up with gifts during the wedding day of a couple, how many actually speak to the couple about what they would need? It would be reasonably safe to reckon almost none outside the immediate circle of family and friends would carry out this exercise. Gifts, in most such occasions, are seen as a way of expressing joy, gratitude, and best wishes.
The key question, however, is what proportion of the gifts given during the wedding day or Diwali, or Christmas, are actually retained by the receiver for specific functional purposes? Assessing the value of gifts, therefore, is more complex than the price label that these objects carry. The `giver’s’ idea about the recipient's needs of a particular object are based on asymmetric information, guesstimates and probabilities.
And maybe, therefore maybe, gift vouchers and the cash gifts may carry a better value because the recipient will be able to make the best use of it by choosing what to buy. For occasions such as 'Secret Santa’, or Diwali, such vouchers can come wrapped in garishly attractive boxes tied in Christmasesque ribbons, just for the thrill of unboxing, adding to the Yuletide spirit.
Such buying also remains one of the principal trigger points to sustain India’s consumer economy, one of the strongest pillars of the India growth story. TechSci Research, a US-based management consulting and research firm, has valued India’s gifting market at $72.56 billion in 2023.
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