Why 1978 demonetisation didn’t hurt India

This graphic published in The Times of India on November 16, 2016 conveys the panic that must have gripped India after currency notes of Rs 1,000, Rs 5,000 and Rs 10,000 were demonetised on Monday, January 16, 1978. Comparisons with the prevailing cash crisis are natural. But did India really panic 38 years ago? No, and here’s why:

Surgical Strike

Prime Minister Narendra Modi has likened his November 8 decision to demonetise Rs 500 and Rs 1,000 notes to a military ‘surgical strike’, but others say it resembles ‘carpet bombing’ because every citizen is affected by it. In contrast, the 1978 demonetisation was genuinely a surgical manoeuvre as only the truly high-denomination notes were taken out.

A Rs 1,000 note from 1978 would be worth Rs 13,689 today. Conversely, the just-demonetised Rs 1,000 note would have been worth only Rs 73 back then.

There were demands in and before 1978 to demonetise even the Rs 100 note — worth Rs 1,369 now— but neither the Janata government of 1978, nor the Congress governments before it, heeded them. Most salaried people earned less than Rs 1,000 a month and the pain would have been felt all across.


Unlike now, when 86% of India’s currency has been frozen, the 1978 demonetization affected a minuscule proportion of currency notes. Although they were the highest denomination notes, together they amounted to only about 1.8% of the currency in circulation, by value.


So, why are hundreds of people in the queue outside Reserve Bank of India’s Mumbai building in the January 18, 1978 photograph used in TOI’s graphic?

Small Window

Although the general public was not affected by the demonetisation, a rush ensued at Reserve Bank and State Bank offices because the government gave only three days to deposit the high-denomination notes.

The owners of large notes had to visit “the office or sub-office or branch of the Reserve Bank of India or the main office or branch of the State Bank at the headquarters of a district or any other office of a public sector bank notified in this behalf by the Reserve Bank” in person, and submit their notes along with a declaration by Thursday, January 19, 1978.

If they failed to exchange the notes within those three days, they had to submit the notes and the declaration at an RBI office by January 24, along with an explanation for the delay. General banking operations were not affected by the decision and the chaos, if any, was over within a week.

Why Demonetise?

Why were high-denomination notes demonestised in 1978? Surprisingly, then minister of finance, revenue and banking H M Patel told Parliament on March 23, 1978, the government had NOT targeted black money:

The total number of these notes in circulation was worth Rs 145 crore (1.45 billion). The total number of notes in circulation in this country today is over Rs 8,000 crore (80 billion). Therefore, quite obviously this could not have ever been designed to achieve anything of the nature of trying to attack even the black money problem, etc. It had no such objective…The objective was one of preventing illegal transactions and that will certainly be achieved…

During the debate before the passage of the High Denomination Bank Notes (Demonetisation) Bill, 1978, Patel said:

It was brought to Government’s notice that high-denomination banknotes were being used extensively for illicit transfer of money for financing transactions which are harmful to the national economy or which are for illegal purposes. Immediate action to demonetise banknotes of the denominational value of Rs 1,000, Rs 5,000 and Rs 10,000 issued by the Reserve Bank of India was, therefore, considered necessary by Government in public interest.”

Familiar Controversies

The government had ordered demonetisation through an ordinance shortly before Assembly elections in some states. The Opposition then, as now, cried foul and alleged the decision was politically motivated.

Noorjehan Razack, an AIADMK member of Parliament from Tamil Nadu, said: “The timing of this demonetisation ordinance was such that it appeared more as a political act on the eve of the Assembly elections to take the teeth out of certain political parties than a purposeful, well-directed and well-coordinated economic offensive against the well-entrenched forces of black money.”

Sanat Kumar Raha, a CPI member of Parliament from West Bengal, said: This ordinance was promulgated just before the elections and it has already strengthened the doubts and suspicions in the minds of the people… When the government brought out the ordinance it was nothing but a case of publicity, and not a matter of performance. The publicity was meant only as a political stunt because the government wanted to give some radical ideas.”

The Result

What did the 1978 demonetisation achieve? It certainly did not root out corruption or black money, or the whole country wouldn’t be going through the pain of another, bigger sweep-up 38 years later. By the end of the action, high net worth individuals had submitted notes worth Rs 595.5 million while Rs 649.5 million in large notes was found to be in the possession of banks. About Rs 160 million remained unaccounted.

On April 25, 1978, minister of state for finance Zulfiquarullah told Parliament: “Notes of an approximate value of Rs 16 crore (160 million) have not been tendered. They have ceased to be legal tender and are therefore valueless. No follow-up action is necessary.”


Six months after demonetisation, Patel summed up the results thus on July 18, 1978:

The demonetisation of high-denomination notes had the limited objective of stopping the illicit transfer of money for financing transactions, which, apart from resulting in tax evasion, were harmful for a healthy growth of the economy. The measure resulted in the high-denomination banknotes of an approximate value of Rs 16 crore (160 million) not having been tendered for exchange becoming valueless and therefore, would not form part of money supply. Apart from the psychological impact which such a measure has had on tax evaders, black-marketeers etc, it has yielded valuable information to tax authorities in respect of persons who tendered high-denomination notes for exchange, which, it would appear, indicates tax evasion in a number of cases.”

It merely told government where to sniff next time. But that information couldn’t have been a secret anyway.


Don’t miss

India repeatedly ruled out demonetization in the 1970s



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