Repeated extensions reduced the misery of the state’s poor during the switch to Indian rupee
India’s demonetisation has been a talking point ever since Prime Minister Narendra Modi sprung it upon an unsuspecting nation late on November 8, 2016. Some have argued that it’s not a true demonetisation but a note swap. Take new notes for old ones. There is a lot of suffering due to currency shortages, but imagine how much more painful this exercise would have been had India transitioned to a new currency, say the dollar.
Instead of rupees we would be using a currency worth 70 times more. How would that affect prices? How would the lives of the poor be impacted?
It happened in Hyderabad
Something of that kind happened in Hyderabad state, not the city, shortly after Independence. The princely state of Hyderabad had its own currency, the Hali sicca, during British rule but it was allowed to continue using it for some time even after Independence.
Switching to the Indian rupee at the earliest was in Hyderabad’s interest as it would have aided commerce, so just before its integration into the Indian union the state made Indian currency legal tender in its territory. The exchange value was fixed at six Indian rupees for seven Hali sicca rupees, and it was decided to phase out the old currency by 1951.
Fears of the poor
The decision to demonetise the Hali sicca spooked the state’s poor. Although Hyderabad’s rulers were famous for their opulence, the state had many very poor people.
The poorest people living in villages earned only 3-4 annas a day in the Hyderabad currency, and they made most of their purchases using coins of 1 paisa (Hyderabad) denomination.
Why were the poor afraid? Because the Hali and Indian currencies differed in two significant ways:
First, the Indian rupee was worth roughly 17% more than the Hyderabad rupee, so the people expected their nominal earnings to reduce in proportion. A clerk who earned 35 Hyderabad rupees in a month would get only 30 Indian rupees after demonetisation.
Second, unlike the Indian rupee that had 64 paise in those days, the Hyderabad rupee had 96 paise. Consequently, each Hyderabad paisa was worth only two-thirds (67%) of an Indian paisa nominally. Factor in the exchange value (6/7), and the real value of a Hyderabad paisa reduced to 57% of an Indian paisa.
Next, imagine that a kilogram of potatoes cost 1 Hyderabad paisa back in 1951. If the state’s coins were demonetised overnight, and the merchants did not reduce prices accordingly, the real price of a kilogram of potatoes would shoot up by 75% because it would now be sold for 1 Indian paisa rather than a Hyderabad paisa.
There were demands to reintroduce the discontinued (Indian) half-paisa coin and also delay demonetisation.
What did Government of India do?
Realising how hard demonetisation would hit Hyderabad’s poor, Government of India deferred it by two years. Although the state could not issue any new currency, the Hyderabad subsidiary coin, rupee coin and one rupee notes were allowed to remain legal tender till March 31, 1953.
When the next date arrived, a substantial amount of the old currency was still in circulation in Hyderabad, so the deadline was extended by another two years.
“The holders of the state currency are being protected by continuing its legal tender character so that the currency may continue to circulate freely and the holders may have ample time to arrange for the exchange of their holdings,” then deputy finance minister of India, M C Shah, said on March 28, 1953.
The deadline for demonetisation was again extended by two years, but on the last day of March in 1953, all banks in Hyderabad converted all their Hali sicca accounts to Indian rupee accounts at the exchange rate of 116–10–8 (rupee-anna-paisa) Hali sicca for 100 Indian rupees. They also stopped paying cheques in Hali sicca on withdrawals by the public.
You could continue using the Hali sicca in Hyderabad’s markets, but if you went to a bank you would have got only Indian rupees.
India had put Rs 718.7 million into circulation in Hyderabad between January 1950 and December 1953 but even in February 1954, small Hali coins of the value of Rs 15 million were in circulation.
What Hyderabad needed was plenty of small coin for households and the street-level economy to function. So the Centre helped the state acquire more coins, especially of eight annas or less value, for a period of one year.
Reserve Bank of India also opened currency chests at the branches of Hyderabad State Bank for the exchange of Hali currency into Indian currency.
Finally, when the deadline of March 31, 1955 arrived, the public still held the equivalent of Rs 64.9 million in the old currency. It was no longer legal tender but people were allowed time till March 31, 1956 to exchange it for Indian rupees.