It is not the first time that India has demonetised high-denomination currency notes. The last one was on January 16, 1978 when, overnight, Rs. 1000, 5000 and 10,000 bank notes stood withdrawn by an Ordinance issued by the President of India. The Ordinance provided that all banks and treasuries would be closed on January 17 and only three days were given to the public to deposit the high-denomination demonetised notes. Long queues were found outside Reserve Bank of India (RBI) offices all over India for deposit of demonetised notes, but there was, no confusion, panic or chaos like that followed Prime Minister Modi's announcement on demonetisation of Rs. 500 and Rs.1000 currency notes on November 08, 2016. Although RBI has laid down detailed procedure for exchange of demonetised bank notes with notes of new series, the severe cash crunch following demonetisation led to chaos, confusion, riots, violence and even deaths of some people standing in the queue for exchanging old notes for new ones.
The reasons are not far to seek. The total bank notes in circulation in India in 2016 are valued at US$ 240 billion (Rs. 16.42 lakh crore), of which around US$ 210 billion (Rs. 14.1 lakh crore) of Rs. 500 and Rs. 1000 bank notes were demonetised. In 1978, the value of the demonetised notes were Rs. 1.45 billion (145.42 crore). About 86 per cent of the notes in circulation has been demonetised in 2016, as against only 1.8 per cent in 1978. No wonder, millions of common people with no access to banking system were totally caught unawares with Rs. 500 and Rs. 1000 notes that has created an atmosphere of total panic. The enormity of the problem was possibly not foreseen.
The claim that demonetisation would eliminate black money from the economy has been contested by a number of luminaries. Referring to demonetisation of 1978, the then RBI, Governor, Dr. IG Patel pointed out that such exercises seldom produce striking results. The idea that black money or wealth is held in the form of notes tucked away in suitcase and pillowcases is naïve. Former World Bank Chief Economist, Kaushik Basu said that the 'damage' is likely to be much greater than any possible benefits. India's Central Board of Direct Taxes in 2012 recommended against demonetisation for tackling the problem of black money.
Demonetisation helps unearth hoard of money concentrated in a few hands, but does not prove that the money was ill-gotten. To establish that would call for separate investigation by the tax officials from the trails left behind through encashment and exchange of unusual number of old notes. In 1978, the then Indian Finance Minister H. M. Patel told Parliament that in demonetising high-value bank notes, the government had not targeted black money.
In the press conference that followed Prime Minister Modi's announcement of demonetisation, the Economic Affairs Secretary emphasised that the decision to demonetise was taken to eliminate the forged Rs. 500 and Rs. 1000 bank notes the supply of which increased by 76 per cent and 109 per cent respectively between 2011 and 2016. The forged cash used to fund terrorist activities against India had to be invalidated.
The key question before Prime Minister Modi now is how to remove the still-persisting hardship and sufferings of the common people without compromising on the goals of operation cash cleanup. In 1972, faced with a situation where Pakistani notes of all denominations were legal tender in Bangladesh, the then Bangladesh government did not rush for demonetisation, but took a step-by-step approach to gradually withdraw Pakistani notes from circulation and replace them by Bangladeshi ones. The first step was to print notes of all denominations in sufficient quantities by De la Rue in UK and issue the newly printed notes through the banking channel side by side with the old Pakistani notes which were allowed to remain legal tender for 2-3 months more. The banks were advised to mop up the Pakistani currency notes until they became invalid. Except for Rs. 50 notes which had to be demonetised midway when Pakistan abruptly demonetised their Rs. 50 notes, the withdrawal process of other Pakistani notes and their replacement by Bangladeshi notes were smooth and uneventful.
The writer was the first Finance Secretary of Government of Bangladesh.
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