Almost four decades ago, it was a politician from Gujarat — who first was finance minister and later went on to become the Prime Minister under whose watch — the last major demonetisation — or the process of rendering high value currency notes illegal tender was carried out. That was in January 1978 when Morarji Desai was the Prime Minister and the finance minister was HM Patel, a former finance secretary and also from Gujarat like Morarji Bhai.
On Tuesday, Narendra Modi the second Gujarati PM announced the government’s decision to phase out currency notes of the denomination of Rs 500 and Rs 1,000 with effect from tonight, marking it the third time that it has been done in India —the first being in 1946. In 1978, when the Janata government headed by Morarji Desai came to power, defeating the Congress after the emergency, the rationale for doing away with high denomination notes — of Rs 1,000, Rs 5,000 and Rs 10,000 was that it could help curb check illicit transfer of financing which was harmful to the national economy or for other illegal purposes.
As in today’s case, on January 16, 1978, the government said that high value notes would cease to be legal tender at the close of banking hours on that day and that all banks and treasuries of governments would remain closed for transactions — the next day on January 17. The High Denomination Bank Notes (Demonetisation) Act, 1978, kicked in which barred the transfer and receipt of high denomination bank notes. That law made any contravention including false declaration by depositors and others punishable — with a fine or a three year prison term. At that time gold and commodity prices fell sharply. But the impact was limited. Yet, ironically, a government committee headed by the chairman of CBDT, had in 2012 said in a report that demonetisation may not be a solution for tacking black money in the economy which it said was largely held in the form of benami properties, billion and jewellery. It would only increase the cost as more currency notes may have to be printed for disbursing the same amount. It could also have an adverse impact on the banking logistics.