Demonetization of high-value notes took India by surprise on November 8, 2016, mainly because ‘high-value’ or ‘high-denomination’ is not very high these days. A Rs 500 note is not even a tenner in the US, UK or the rest of Europe. You can’t buy a 10kg bag of rice with it nor fill up a motorbike’s tank with petrol. It’s such a common note now that even a poor farmer or domestic help has some at home. So, unlike in 1978, demonetization has hurt everyone this time.
As for Rs 1,000 notes, consider this: there were 6.3 billion Rs 1,000 notes in circulation at the end of November 8, 2016, but back on February 29, 1972, there were only 392,867 notes of that denomination. Their supply increased more than 16,100 times in 45 years.
Was demonetization necessary? Let the experts debate that. Is it a stroke of genius? Time will tell, and we already know the Janata government did it in 1978. There’s no economics Nobel in it certainly.
But even the 1978 demonetization was not a novel step. Rumours of demonetization had stoked panic many times before that. In the middle of 1973, for instance, a scare spread that the Rs 100 note would be demonetized. It was worth far more than today’s Rs 500 note. Understandably, there was a rush at bank counters to change it for notes of Rs 10 and Rs 20 denominations.
The September 8, 1973 issue of ‘Current’ alleged that some powerful people were spreading the rumour and bank staff were changing notes after illegally discounting them by 10–20%. But the government denied any move to demonetize Rs 100 notes. Then minister of state for finance K R Ganesh told Parliament on Nov 27, 1973:
“Government have repeatedly made it clear in the course of the debate on Wanchoo Committee’s report in Lok Sabha in September 1972, and also on a number of other occasions in both Houses of Parliament in August 1973, that there is no proposal under consideration for demonetization of currency notes.”
What did Ganesh mean by repeatedly? Did the question of demonetization come up often? It did fairly regularly.
On August 5, 1970, Sasankasekhar Sanyal of the CPI(M) asked “whether government propose to demonetize our currency notes as one of the effective steps towards unearthing of undisclosed money and towards counteracting the evasion of wealth tax and income tax?”
Then minister of revenue and expenditure Vidya Charan Shukla replied: “The government does not consider demonetization of currency notes as providing the answer to the problem of undisclosed money. The government is, however, constantly engaged in detecting tax evasion, which is the principal source of undisclosed money. Currently, a committee of experts is engaged in the task of examining and suggesting legal and administrative measures for countering evasion and avoidance of direct taxes.”
A year later, demonetization of Rs 100 and Rs 1,000 notes was rumoured again, and there were reports about people rushing to get these changed for Rs 10 notes.
Then finance minister Y B Chavan also confirmed on May 25, 1971: “From the figures of receipts at the Reserve Bank counters during the last few months, it appears that, as compared to a year ago, there has been a slight increase during March and April, 1971 in the receipts of hundred-rupee notes but the total number of thousand-rupee notes presented in the first four months of 1971 is considerably smaller than the number of notes presented in the corresponding months of 1970.”
On the question of demonetization, Chavan was clear that “There is no such proposal under consideration.”
That was the government’s reply a year later also when revenue and expenditure minister K R Ganesh told Parliament on May 23, 1972: “There is no scheme for demonetization of high-denomination currency notes.”
The Janata government only acted on an idea that had worried India repeatedly for years.