A few months after the NDA government led by Atal Bihari Vajpayee came to power in May 1998, Finance Minister Yashwant Sinha had to address concerns relating to the growing demand for fresh currency notes. High value notes of Rs 1,000, 5,000 and 10,000 had been demonetised in the true sense of the term almost two decade ago, and given the growth of the economy since then, there was a feeling in the government that high denomination notes would have to be re-introduced. The Reserve Bank of India was sounded out, and the plan received backing from some of the big industry chiefs on the bank’s board. That’s when the government decided to undo what the Morarji Desai government had done in 1978 — and go ahead with a law to bring back the Rs 1,000 note. Sinha told Lok Sabha on December 9, 1998, that he was certain that lawmakers would share his view that the root cause of illegal transactions lay not in notes of high denomination, but elsewhere — he didn’t specify where.
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But the interesting part was the Finance Minister’s argument that the purchasing power of the rupee had gone down considerably since 1978, when high value notes were junked. The value of Rs 1,000 in 1998, compared to the movement of the Consumer Price Index taking 1982 as the base year, was only Rs 160. This meant the average consumer now needed notes of a higher face value for normal cash transactions. This — and taking into account the fact that other methods of payment were yet to take root — was why the government was, in the public interest, re-introducing the Rs 1,000 note.
As many Opposition members attacked the move, the government provided some interesting data. According to Sinha, by 1998, the demand for fresh currency notes was growing at 15% to 20% annually, making it incumbent on the government to increase their production. The government modernised the currency printing presses at Nashik and Dewas and got the RBI to do the same at the two new presses under its control at Mysore and Salboni. To ease pressure on Rs 100 notes, it stepped up production of Rs 500 notes, and imported 3,600 million pieces of printed notes (2,000 million piece of Rs 100 notes and 1,600 million of Rs 500 denomination) of a total face value of Rs 100,000 crore. And yet, Sinha said, the demand-supply gap in fresh notes was expected to go up to 12,680 million pieces by 2004-05, which made it imperative to print Rs 1,000 notes to improve supply.
Soon after the government got the law approved, work began in consultation with RBI on policy measures to move towards electronic forms of payments such as Real Time Gross Settlement (RTGS), and National Electronic Funds Transfer (NEFT).
It’s not as though this issue wasn’t recognized earlier. In 1987 — when Prime Minister Rajiv Gandhi also held the finance portfolio — the government introduced notes of Rs 500 denomination. 15 years earlier, when P V Narasimha Rao was Prime Minister, a joint secretary in charge of the coins and currency division in the Finance Ministry had made out a case for bringing in high value notes — only to be rejected by his boss.
Indeed, the problem of ensuring an adequate supply of notes was an issue in the 70s and also in the run-up to the demonetisation of January 1978. For, two months before the decision to do away with Rs 1000, 5000 and 10,000 notes, the central bank had told the government to consider replacing old machines at the currency press in Nashik.
When H M Patel, Finance Minister in the Janata government and a former Principal Secretary, Finance, himself, informed RBI Governor I G Patel of the decision to demonetise high denomination notes, the Governor was not in favour. He told the Finance Minister that such exercises hardly produced any striking results, I G Patel has written in his autobiography.
“Most people who accept illegal gratifications or are otherwise the recipients of black money do not 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 naïve. And in any case, even those who are caught napping — or waiting — will have the chance to convert the notes through paid agents as some provision has to be made to convert at par notes tendered in small amounts for which explanations cannot be reasonably sought. But the gesture had to be made, and produced much work and little gain,” Patel wrote. He was quite prescient.
The government, of course, went ahead and issued an ordinance on January 16, 1978, giving effect to its decision. And, just like it happened last week, it directed all banks and treasuries to be shut the following day — January 17 — for all transactions. The RBI History volumes detail how long, winding queues started to form in front of banks, confusion reigned, and working hours were extended. The volumes also record pessimistic views of the potential impact of the move, expressed by economists such as P R Brahmananda and C N Vakil.
But a month later, in his Budget speech of 1978-79, Finance Minister H M Patel said the demonetisation of high value currency notes was aimed primarily at controlling illegal transactions, and was part of a series of measures that the government had taken — and was determined to take — against anti-social elements. Patel, also an economist who had been instrumental in the nationalisation of life insurance companies, then referred to the smuggling of gold, which he said helped sustain black money operations.
The Finance Minister announced the sale of gold from stocks held by the government as one of the measures aimed at preventing smuggling of the precious metal. This was to land him in trouble later, as the next government headed by Indira Gandhi launched a probe to fix responsibility for any loss to the exchequer. Ironically, the probe was led by K R Puri, the former RBI Governor who had to leave soon after Janata came to power and H M Patel became Finance Minister. In her election campaign earlier, Indira Gandhi had made gold an issue, accusing the Janata government of making even the wedding mangalsutra costlier for common people — the campaign earned rich dividends in the form of seats for her in Maharashtra.
In sum, neither measure — on currency or on gold — worked then. The pulling out or immobilising cash or high denomination notes which constitute 85% of the stock in circulation is an exercise that is perhaps unique to a large economy. The going is bound to be tough.