Did you know this wasn’t the first time the Indian government has gone for demonetisation of high-value currency to tackle the menace of black money?
The move was first implemented in January 1946 when the Reserve Bank of India discontinued Rs 1,000 and Rs 10,000 notes (Yes, we had a Rs 10,000 denomination note).
Eight years later, in 1954, Rs 10,000 was brought back in a fresh avatar and a Rs 5,000 rupee note introduced. Later, in 1978, the Morarji Desai government that took over after a resounding vote against the Emergency in 1977 demonetised the big value notes, allegedly to target hoarding by erstwhile prime minister Indira Gandhi.
Trivia apart, the past experiments with demonetisation had ended in failure, as a 2012 report by a black money committee headed by the chairman of Central Board of Direct Taxes (CBDT) noted.
The report titled, 'Measure to tackle Black Money in India and Abroad', while discussing demonetisation as one of the ways to 'kill' the black economy or curb generation of black money, found it impractical despite its 'noble aims'. It revealed that in both instances of demonetisation, in 1946 and 1978, less than 15% of high currency notes were exchanged, while over 85% of the currency notes never surfaced, as the owners feared penal action by central agencies.
The report quoted former Delhi University professor and economist Suraj B Gupta who criticised the measures taken by the government to unearth black money. In his study, 'Black Income in India' (1992), Gupta discussed the Voluntary disclosure of Income (VDI) Schemes of 1951, 1965, 1975 and 1985, Special Bearer Bond (SBB) Scheme of 1981, and the demonetisation of currency in 1946 and 1978, apart from touching upon the schemes launched by the government in 1991-92.
His critique mostly indicated that tackling the black money menace had to do with implementation of existing laws and prevention measures. Thanks to improper execution of statutory tax provisions; ineffective surveys, search and seizures; enforcement of few penalties; and rare prosecutions due to legal loopholes, the black money economy thrived.
The report also quoted former JNU professor Arun Kumar who in his study, 'The Black Economy in India' (1999) wrote against the 1978 demonetisation. Kumar, in fact, had also termed the voluntary disclosure schemes and lowering of tax rates as failures.
The report mentioned that demonetisation of Rs 1,000 and Rs 500 was one of the crucial demands from the public, but observed that it may not be a viable solution when it comes to tackling black money as unaccounted money is largely held in the form of benami properties, bullion and jewellery, and not as wads of currency notes.
The report also noted that demonetisation would only increase the cost associated with currency note production, as more currency notes would have to be printed for disbursing the same amount of money.
Reactions of the public to possible demonetisation were adverse, according to the report. They said the move was likely to have an adverse impact on the banking system with its logistics becoming difficult, and would leave the general public inconvenienced as payments of wages/salaries to workers would become challenging.
Besides, demonetisation may also impact the environment as more natural resources would be depleted for printing more currency notes.
The current phase of demonetisation has evoked largely positive responses from the urban classes but there have been several reports of the common public facing immense inconveniences. Time will tell whether it was worth it, or whether this was just another gimmick by a government looking to gain some brownie points ahead of assembly elections in crucial states of Uttar Pradesh and Punjab in the coming months.