Archives

Why India Bunned 86% of it’s Currency

This video is sponsored by Brilliant. The first 200 to use the link in the descriptionget 20% off the annual subscription. On November 8th, 2016 at 8:15 PM, TVs acrossIndia flickered in unison. Dramas, cricket matches, and game shows wereall replaced with the face of Prime Minister Modi. In this unscheduled, surprise address, heannounced the 500 and 1,000 rupee banknotes – worth about 7 and 14 US Dollars, respectively- would soon lose their status as legal tender. Without any monetary value, they would becomenothing but pieces of paper, useless for any and all transactions. ”Soon” meant in 3 hours and 45 minutes- effective immediately at midnight. And those 500 and 1,000 rupee bills constitutedno less than 86% of all cash in circulation. It was as if the U.S. president suddenly announcedall 10, and $20 bills were worthless, only with a population 4 times bigger andfar more reliant on cash. The next few months were the result of a fascinating,unintended experiment, as 1.3 billion people scrambled to replace their cash, the governmentrushed to print new bills, and dozens of people died in the process. India runs on cash. It’s estimated that, measured by volume,90-98% of all transactions in the country involve physical currency. and 85% of workers are paid in cash, whileonly about half the population owns a bank account. These are optimal conditions for tax theft,making it extremely easy and extremely common for earnings to go unreported, and, thus,unknown and untracked by the government. The informal, underground economy makes upsomething like 25 to 40% of the nation’s GDP. While salaried workers have taxes automaticallywithheld from their paychecks, they represent only a tenth of all organized workers.

Farmers, meanwhile, who make up about halfthe nation’s workforce, are largely exempt – protected from politicians by their largevoting power, not unlike seniors in the United States. In 2016, only 37 million Indians filed taxreturns, 10 million of which were exempt, leaving only a tiny 27 million payers in acountry of 1.3 billion. Modi’s solution was simple: force everyoneto report their earnings. From November 9th, Indians had until December30th to take their 500 and 1,000 rupee notes to the bank. There, they could be deposited for their fullvalue, or exchanged for other notes at the counter, for a maximum of 4,000 rupees perperson per day, later increased to 4,500 and then reduced to 2,000. Tax avoiders, big and small, now had no choicebut to declare their wealth or lose it all come January. Any strange, large deposits without explanatorypaperwork would be an instant red flag for the government. But here’s where everything went wrong: The central bank couldn’t prepare millionsof new, replacement banknotes in secret. Printing them in advance would therefore attractattention, potentially cause chaos, and alert the very criminals the policy was meant totarget. For this reason, the Reserve Bank could onlystart printing the new 500 and 2,000 rupee notes after the announcement – leaving itwith just under 4 hours to reprint the vast majority of the second-most populous nation’scurrency. Clearly, it was an impossible task. Now, having to bring cash to deposit or exchangewould’ve been disruptive enough for many Indians, but because the new banknotes were in suchshort supply, long lines formed outside banks and ATMs for months. On top of that, the replacement bills wereslightly smaller, requiring ATMs to be retrofitted to use them. There were lawsuits, strikes, and protestsagainst what many saw as an unreasonable interference by the government in daily life.

And despite all that, there’s good reasonto be skeptical the policy achieved its intended effects. Broadly speaking, there were two goals ofdemonetization: First, to weaken terrorist funding, and second, to target the informal, blackeconomy. Both of which are hard to measure. Whether terrorist groups suffered any significantlosses as a result of demonetization, no one knows with certainty. And the black market is problematic preciselybecause it can’t be measured. What we do know, according to the ReserveBank of India itself, is that 99.3% of the demonetized notes were later returned. In other words, the policy removed only atiny amount of money from circulation. Experts largely agree black money is mostlystored in the form of gold, silver, real estate, and overseas bank accounts, not bills worth7 or 14 US Dollars each. It’s true that demonetization added a record9 million new taxpayers, but the mass disruption it caused also removed nearly the same amount- 8.8 million people stopped paying that year, likely as a result of lost income. And while digital payments experienced a significantspike in usage, there was no lasting effect after the new banknotes were fully distributed. Three years later, the only certain outcomeof demonetization was the immediate chaos it created across the nation: Hours wastedat the bank, financial uncertainty for those most vulnerable, lost wages, and at leastseveral innocent lives. Worse, it came out of nowhere, not as a responseto inflation or unrest. So, why, then, given all that we now know,is the policy still so popular in India, among those who personally paid its costs? Like Xi Jinping’s consolidation of powerin China, Modi successfully sold a story of unfairness, of targeting corruption and criminals,to ultimately gain political support. Soon after, Modi’s party won the 2017 electionsof its 200-million person, most populous state in India, thanks, in part, to the popularbelief that demonetization was a collective sacrifice necessary to make the rich pay theirfair share.

Anyone who protested the policy could easilybe labeled as a criminal trying to hide black money. Rather than turning the population againstthe government, demonetization enlisted it, making people feel they were personally doingtheir part to help fight crime. Modi’s party could’ve passed just as effectivebut less disruptive laws targeting black money and explained them to gain support. Instead, he knew the most effective way toconvey information is by showing people, firsthand. Demonetization achieved its real goal of drivingpolitical support by making a faraway, abstract concept tangible and interactive. Likewise, Brilliant is a math, science, andcomputer-science website that uses interactive teaching, but, for good! If you’ve ever wondered how Google can searchthrough literally billions of results in less than a second, or how to win Poker with probability, or how computers learn new things on theirown, Brilliant is for you! One puzzle, or game, or story at a time, ittakes you from the very basics through to the most advanced. Because you’re watching this video, I knowyou like learning new things, so why not check out Brilliant and see which of their over60 topics you’d like to learn next. You can use the link in the description tostart learning whatever interests you most for free, and the first 200 people will get20% off the annual premium subscription, so you can view all Daily Challenges and unlockdozens of problem-solving courses. Thanks to Brilliant and to you for watchingthis video.