Is Narendra Modi’s currency ban the first in Indian history?

19th Nov 2016
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Our Prime Minister, Narendra Modi, shocked us all with his announcement of the currency ban earlier this week. While there has been a mixed reception of his bold move, the ripples it has caused is undeniable. The question on everyone’s mind is how this move will really help curb parallel economy in the long run. Perhaps a look into the past will help predict the future? The Indian government is not a novice when it comes to demonetisation for it has already been implemented twice in the past. Read on to see how they have fared.

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Seventy years ago

It was in 1934 that high denomination currency was first introduced in India. After only four years of Rs500 and Rs1000 in circulation, the RBI in an ambitious move introduced Rs10,000 notes in 1938 – the highest denomination ever printed in India till date. The first currency ban occurred in 1946 when the government withdrew Rs 1000 and Rs 10,000 from circulation. This move was of very little consequence to the Indian population as such a large sum of money was not accessible to most – high-value notes really were of high value. Rs1000 and Rs10,000 were, however, reintroduced in 1954 and Rs 5000 was introduced for the first time.

To value or not to value?

The early 70s saw a flurry of demonetisation rumours and their subsequent panic. The Wanchoo committee, a tax inquiry committee set up by the Planning Commission of India, had submitted a report to the Lok Sabha recommending demonetisation to counter the accumulation of black money. Because this recommendation was made publicly, the word got out. But as is always the case, the facts were twisted and the recommendation found its way to the public as a certainty. Chaos ensued as black money hoarders acted quickly to hide their tracks. With rumours going around that Rs 100 was being removed from circulation, banks saw a rush of people, similar to what we see now, as people hoarded to exchange Rs.100 notes for Rs.10 and Rs.20.

The government denied any consideration of demonetisation proposals that came their way. In 1972, following the rumours, the Revenue and Expenditure Minister, KR Ganesh, stated to the Parliament that “There is no scheme for demonetisation of high-denomination currency notes.” Officials had to clear several such misconceptions the following year as well, standing by the revenue minister’s statement of the futility of demonetisation – “The government does not consider demonetisation 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.”

Morarji Desai’s ‘bold move’

When the Janata Party coalition government came into power, Morarji Desai implemented The High Denomination Bank Notes (Demonetisation)Act in 1978. Like Modi, his aim was to choke the counterfeit and black money circulating in the economy. But unlike Modi, he didn’t have the enthusiastic support of the RBI governor. I.G Patel believed the currency ban was put in effect simply to cripple the funds of the opposition party.

On January 16, Desai demonetised Rs 1000, Rs 5000 and Rs 10,000 notes and announced the currency ban over the radio. The affair was kept confidential in a way similar to Modi’s currency ban and all banks were closed the following day. Patel, however, was of the opinion that demonetisation would not be very effective in curbing black money as most people who do collect it never keep it in currency form for too long. Sure enough, it was seen that the demonetisation effort had no real effect on the circulation of black money, as Abhiroop Sarkar from The Indian Statistical Institute noted.

Back to the present

Narendra Modi’s currency ban may not have been the first the country has seen, but it is definitely the first that has caused such a stir. While the previous demonetisation acts affected only the privileged few, Modi’s currency ban, in contrast, has been barely felt by the privileged few with access to online payment methods. Black money hoarders on the other hand, are feeling the heat. But the role that this currency ban will play in the future of corruption control is yet to be seen.

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