The central government’s move to withdraw Rs500 and Rs1,000 currency notes in circulation on Tuesday at such short notice may have come as a surprise, but it’s not the first time the government has demonetized banknotes.
Withdrawal of high-denomination rupee notes is a radical measure the government normally resorts to in an attempt to counter forgery.
It has been done at least twice in India’s history in the past time. This time, the attempt is to crack down on black money.
In January 1946, Rs1,000 and Rs10,000 banknotes were withdrawn. In 1954, Rs1,000, Rs5,000 and Rs10,000 notes were reintroduced and were again demonetized in January 1978.
The second demonetization has a backstory. In the early 1970s, the Wanchoo committee on black money had recommended withdrawing certain banknotes.
However, this suggestion could not be acted upon because the very publicity given to the recommendation resulted in black money operators getting rid of high-value currency notes.
In 1978, the Janata Party coalition government, which had come to power a year earlier, decided to withdraw Rs1,000, Rs5,000 and Rs10,000 notes by issuing an ordinance on the morning of 16 January that year.
The Reserve Bank of India’s (RBI) history (third volume) describes the process in detail. It goes something like this:
On the morning of 14 January 1978, R. Janaki Raman, a senior official from chief accountant’s office in RBI, was asked by a government official over telephone to go to Delhi to discuss matters relating to exchange control.
On reaching the capital, Raman was told that the government had decided to withdraw high-denomination notes and asked to draft the necessary ordinance within a day.
During that period, no communication was allowed with RBI’s central office in Mumbai, “since such contacts could give rise to speculation.”
The draft ordinance was completed on schedule and sent for signature to President N. Sanjiva Reddy in the early hours of 16 January. The news was announced on the All India Radio news bulletin at 9 am on the same day. The ordinance provided that all banks and treasuries would be closed on 17 January.
The then RBI governor I.G. Patel was not in favour of this exercise. According to him, some people in the Janata coalition government saw demonetization as a measure specifically targeted against the allegedly “corrupt predecessor government or government leaders”.
Patel recalled in his book Glimpses of Indian Economic Policy: an Insider’s View, that when finance minister H.M. Patel informed him about the decision to withdraw high-denomination notes, he had pointed out that such exercises seldom produces striking results.
Most people, Patel said, who accept illegal gratification or are otherwise recipients of black money, rarely keep their ill-gotten earnings in the form of currency for long.
The idea that black money or wealth is held in the form of notes tucked away in suitcases or pillow cases is naive, Patel said. In any case even those who are caught napping or waiting will have a chance to convert notes through paid agents as some provision has to be made to convert at par notes tendered in small amounts for which explanation cannot be reasonably sought, he added.
Source : Mint