Why is the demonetisation of high currency notes in 2016 by PM Modi totally different from the one by Morarji in 1978 ?

In the early hours of evening on November 8, 2016 The Prime Minister of India sent out a message that he will be addressing the nation at 8 pm. At the scheduled time, he made a historic announcement of demonetizing the currency notes of denominations Rs 500 and Rs 1000 immediately from the midnight. It was totally unexpected and took the entire nation by surprise. The PM took this step to fight against corruption, menace of black money, wage a war on terrorism & naxalism which are funded by unaccounted cash.

This was NOT the first instance of demonetization of high value currency notes. On January 16 1978, the Prime Minister of India Shri Morarji Desai had also demonetised the currency notes of denominations Rs 1000, Rs 5000 and Rs 10000. He had announced that these currency notes would cease to be legal tender from that evening once the banks closed and the banks were closed on 17 January 1978 for all transactions. That time also, the step of demonetization was taken with a view to curb unaccounted wealth and black money. However, the demonetization of 1978 did not yield the results as expected. Now it raises a very pertinent question – if the demonetization of high value currency notes in 1978 did not succeed, why did Narendra Modi do the same thing again in 2016 ? Why is it that the same step of demonetisation of high value notes by Narendra Modi is hailed across the spectrum as “surgical strike” on black money ? Let us explore the reason.

In 1978, the high denomination currency notes of Rs 1000, 5000 and 10,000 only accounted for just 2 % of the total cash. Government had printed these high denomination notes which had a total value of only Rs 145 crore. Even out of this value printed, only 60 crore ( that is less than 1%) was in circulation. The rest amount of Rs 85 crore were not out for circulation and was in the RBI chest. The majority of cash in the market at that time (more than 99%) was in form of lower denomination which continued to be legal tender.

Now have a look at the scenario today. Before Prime Minister Narendra Modi’s initiative of demonetization, the currency notes of Rs 500 and Rs 1000 denomination account for 86% of the cash (Roughly Rs 14,00,000 crore). While Rs 1000 notes account for 38% (Rs 6,33,000 crore) of the total cash circulation , the notes of denomination Rs 500 account for 48% (Rs 7,85,000 crore) of the total cash circulation. Just for information, the notes of 100 rupees denomination account for about 9.5 % of the total cash flowing in the system.

To conclude, while the total value of the notes that were banned in 1978 was less than 1% of the total cash in the system, the value of the notes banned in 2016 by PM Modi is about 86% of the total cash in the system and amounts to Rs 14,00,000 crore out of which a large portion (estimated to be more than 25%) is unaccounted. Therefore, the demonetisation of higher value notes in 2016 is a massive crackdown on black money and counterfeit currency just by the sheer magnitude of money involved. Comparing this with the demonetization of 1978 and drawing parallels is totally flawed and uncalled for. Having said that, total credits to Morarji Desai who also had the vision to think in this regard and take a concrete step. Otherwise, the inaction on the issue of black money by the party which has ruled for 60 years is well known by people of India !

Kshitij Mohan