Demonetization Then And Now

Mr Modi may have shocked the nation with yesterday’s announcement of demonetization, but the prime minister’s move was hardly unprecedented. India has demonetized select denominations of its currency twice before.The first was when Rs1,000, Rs5,000, and Rs10,000 notes were taken out of circulation in January 1946, a year and a half before the country won independence from the British. The Rs10,000 notes were the largest currency denomination ever printed by the Reserve Bank of India, introduced for the first time in 1938. All three notes were reintroduced in 1954.

In the early ’70s, the Wanchoo committee, a direct tax inquiry committee set up by the government, suggested demonetization as a measure to unearth and counter the spread of black money. However, the public nature of the recommendation sparked black money hoarders to act fast and rid themselves of high denominations before the government was able to clamp down on them.

Then, in 1977, the Janata Party coalition government came into power. A year into the government’s term, party leader Morarji Desai was more bullish about cracking down on counterfeits and black money. The High Denomination Bank Notes (Demonetisation) Act, instated by the ruling party on Jan. 16, 1978, deemed the Rs1,000, Rs5,000 and Rs10,000 notes illegal for the second time.At the time, then-RBI governor I.G. Patel disagreed with the measure and accused the Janata coalition government of trying to cripple the corrupt predecessor governments instead of simply eradicating black money.

For the most part, Mr Modi’s measure mirrors Mr Desai’s—except this time, he has the backing of his RBI governor, Mr Urjit Patel, who applauded Mr Modi’s “very bold step” addressing concerns about the “growing menace of fake Indian currency notes.” However, his assessment is contested because people don’t stack black money in cash. More about black money here : Link

The decision then too had taken the public by surprise, leading to panic and a rush to banks although people were given time to exchange old notes.

To put things in perspective, a Rs 1,000 note in 1978 could buy 5 sq ft of real estate space in south Mumbai. In 2016, a Rs 500 note would not even be worth 100th of a square foot.

Last time, at banks, people were asked to fill in a form when they came to exchange old notes. The banks would inform the I-T cell if people walked in with unusually large amounts. If they were unable to explain the source of income, the I-T wing would levy the prevalent tax, which was as high as 90% in those days. This time over, with talk of terror funding along with counterfeiting and black money,such is the fear of people that at places like Crawford Market and Zaveri Bazar, they were selling Rs 1,000 notes for as little as Rs 300.

In 1978 there was no great disruption, however, since the notes were not with common people. Then they had demonetised Rs 1,000 notes which had a huge monetary value. The 500 and 1,000 rupee notes do not have the same value today; even the average man on the street have these notes. So the number of people affected is much more.