Demonetization – Modi isn’t the first, but could very well be the last

Demonetization – Modi isn’t the first, but could very well be the last

“And what he greatly thought, he nobly dared”, one of the famous quotes by Homer. This quote is spoken to Telemachus, son of Odysseus (Ulysses) by Goddess Athena in the guise of an old and trusted friend, as Telemachus undertakes an ambitious journey. This quote seems to gel very well with Prime Minister Narendra Modi in wake of current ‘Demonetization’ bubble.

As shocking as the unprecedented decision by Narendra Modi sounds, Modi is not the first head of the state to have taken the bold decision. India has witnessed a currency ban before. In the 70s, under the Indira Gandhi regime, Wanchoo committee, headed by Kailas Nath Wanchoo, was appointed to examine and suggest legal and administrative measures to unearth black money, to counter evasion, to check avoidance and to reduce arrears of direct taxes.  Congress at the time conveniently ignored the recommendations keeping in mind the political price her party anticipated to pay. However, after Janata Party came to power, The High Denomination Bank Notes (Demonetization) Act, was instated on Jan. 16, 1978 and declared the Rs1,000, Rs5,000 and Rs10,000 notes illegal for the first time in independent India. This article is an attempt to draw a parallel between the impactful decisions of Janata Party and Bharatiya Janata Party.

Although superficially, Modi’s initiative appears to mirrors Desai’s, the existing conditions and financial implications are like chalk and cheese. Let’s understand some commonalities and differences in the two regimes and the existing political and economic factors at their times.

Circulation of denominations is a major factor. In 1978, the high demonetization currency notes of Rs.1000, 5000 and 10000 only accounted for 2% of the total cash. Government had printed these high denomination notes which had a total value of only 145 crores, out of which, only 60 crores were in circulation. Also, the public nature of the initiative, during Desai’s regime, sent enough warning signals beforehand that the blackmoney hoarders comfortably stashed the illicit wealth. In today’s scenario, the invalidated currency notes of Rs 500 and Rs 1000 accounted for 86% of the cash, roughly 14 lakh crores. Rs 1000 notes accounted for 38% of total cash circulation and Rs 500 accounted for 48% of total cash circulation.  To compare, while the total value of the notes that were banned in 1978 was less than 1% of total cash in the system, the value of notes banned in PM Modi is about 86% of total cash in the system and Modi Sarkar decided to release the effort as a stealth weapon.

 

Role of RBI governor needs a mention here.

At the time, then-RBI governor I.G. Patel disagreed with the measure and accused the Janata coalition government of trying to address the issue superficially instead of simply eradicating black money. Modi, however, had the backing of the RBI governor, Urjit Patel, who backed Modi’s effort, addressing concerns about the FICN circulating in the Indian economy. Some Economists have raised concerns while many have lauded the effort. That does not mean Modi wouldn’t end up eating crow.

Also, In the 70s, digital media was virtually absent, social media was non-existent and thanks to Nehruvian Socialism, the nation had not witnessed economic liberalization yet. In the current digital era, trivial incidents can make it to popular first page headlines at the drop of a hat, that’s how instant the technology is. Added to this, awareness of common man has been increasing exponentially.

However, the commonality being, disruption of uninterrupted Congress regime. In 1977, Janata Party was the first political party to form first non-congress government and in 2014, BJP was the first non-Congress, non-coalitionist party to win a comfortable majority after a long time.  With historic mandate, comes unprecedented responsibility. Simply put, the stronger the mandate, lesser is the voter patience. The adrenaline rush lasts only so long. Remedial measures have to be taken and the collected illicit wealth needs to be disclosed. Hence, although Modi wasn’t the first to implement this, depending on the denouement, he could very well be the last. It’s time to drop the other shoe!

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