When Indira Gandhi chose ‘votes’ over ‘demonetisation’

Despite being recommended by the Justice Wanchoo Committee, the then Prime Minister Indira Gandhi feared electoral consequences and refused to implement demonetisation.

8th November 2016 was a landmark day for India. The Narendra Modi-led government declared demonetisation and banned Rs 500 and Rs 1000 currency notes to rein in corruption. It was indeed a landmark day, but for more than one reason. Prime Minister Modi's decision would set the tone and narrative of the future India was stepping in.

It was a decision plagued with political and electoral risks for the ruling party. A decision that Indira Gandhi had refused to take despite being recommended because it could have hurt the party's future. A decision that should have taken years ago but wasn't because not all politicians are brave enough to think beyond the politics of popularity.

When Indira Gandhi had elections on her mind:

The year was 1970-71 when the Justice Wanchoo Committee recommended demonetisation as one of the moves to rein in black money. Indira Gandhi clearly was no Narendra Modi so the choice for her was clear: Nothing that hurts the vote bank. Fearing the repercussions of a move like demonetisation on the party's electoral fate, she decided against it almost in a jiffy.

When the then Finance Minister Y.B. Chavan sought her approval to implement demonetisation, the former Prime Minister famously said, "Are no more elections to be fought by the Congress?"

Her rebuke and clear stand on the topic meant India was to wait till 2016 for a leader like Narendra Modi who would dismiss political risks and gains, and choose the country first with a decision like demonetisation. The entire episode of Indira Gandhi rebuking Chavan has been written by former bureaucrat Madhav Godbole in his book 'Unfinished Innings: Recollections and Reflections of a Civil Servant'.

Meanwhile, it is noteworthy that 2016 wasn't the first time India saw demonetisation as similar exercises were held in 1946 and 1978. Let us look at what India gained and lost and how these earlier drives fared.

Demonetisation of 1946:

Exactly 70 years before the 2016 demonetisation took place, the pre-Independence government of India banned high denomination currency notes on 12th January 1946. The much-circulated Rs 1000 notes were banned to unearth black money from around the country, which was being hoarded by businesses evading taxes and minting money supplying materials to the allied forces in the just concluded World War II.

While the then Governor of Reserve Bank of India Sir Chintaman Deshmukh officially voiced his apprehensions about the move, the then Indian National Congress party adopted a cautious approach. The party welcomed the move but expressed concern over the challenges the ban brought to the honest citizens.

However, the demonetisation of 1946 led to the collection of an estimated value of 47 crore from across the country. Though there were incidents of distress, exercise did not inconvenience the majority as it involved only a miniscule percentage of money in circulation.

Demonetisation of 1978:

On 16th January 1978, the erstwhile Janta Party government under the prime ministership of Morarjee Desai banned currency notes of Rs 1,000, Rs 5,000 and Rs 10,000. This demonetisation drive was highly ineffective as the public were given mere three days to exchange the currency notes. With no follow-up action or planning in place, the drive was an utter failure.

Even as the then government declared the exercise a success, it was success more for its political agenda than any monetary one. The then RBI Governor I.G. Patel also went on record and voiced his displeasure over the demonetisation exercise of 1978.

Since both the demonetisation exercises of 1946 and 1978 involved banning of higher denominations, the banned notes did not form a significant proportion of the money in circulation.

Demonetisation across the world:

India is not the only country to have witnessed demonetization nor is now the only time when such a drive to tackle corruption has taken place. Here are the five examples of similar drive across the globe at different time periods.

US, 1873: With a focus on moving the United States off bimetallism in favor of the gold standard, the then President Ulysses S Grant signed the 1873 Coinage Act. The Act called for demonetisation of silver coins outlawing silver as a form of legal species and put the country on a path towards the gold standard.

While President Grant believed that the move would provide financial stability to the country, in reality it led to an economic disaster and half a decade of depression that could be controlled only by remonetisation of the silver standard in 1878.

Sri Lankan, 1970: With an objective to create a base for a robust banking sector, the Sri Lankan (Ceylon) government announced the demonetisation in 1970 and declared the 50 and 100 rupee notes as illegal. Considered to be one of the few successful demonetisation drives across the globe, the move is believed to have brought back a substantial amount of money into the banking sector in the 1970s.

With no chaos, common Sri Lankan citizens responded positively and only the rich, who had hoarded money, complained. The move is said to have contributed to the return of the party in power in the next general elections too.

Ghana, 1982: In 1982, the Rawlings government decided to demonetise 50 cedi currency notes to weed out black money and improve the liquidity position of the already fragile economy. The move, however, was a colossal failure and the results were opposite of what the government had planned for.

The ordinary Ghanaian lost faith in the country's banking system and migrated his savings and investment in physical assets and foreign currency holdings increasing the spread of black money and inflation in Ghana.

Nigeria, 1984: In an anti-corruption crackdown, the then military dictator of Nigeria President Muhammadu Buhari issued new coloured currency notes and withdrew the old notes with a limited time frame. However, the goal to revive the debt-ridden and inflated economy was far from achieved and caused severe strain on the country's economy.

Soviet Union, 1980s: Under the leadership of Mikhail Garbochev, the erstwhile Soviet Union withdrew 50 and 100 ruble notes in the late 1980's to weed out black money and increase the currency value. The move, however, backfired and resulted in mass protest and the ultimate demise of the once mighty USSR.

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