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Demonetisation - a flashback

NOVEMBER 10, 2021

By Vijay Kumar

IN 1938, the RBI had issued 1000 and 10,000 rupee notes.

These were demonetised in 1946 by The High Denomination Bank Notes (Demonetisation) Ordinance, 1946 - Section 3 of which read as:

3. High denomination bank notes to cease to be legal tender . On the expiry of the 12th day of January 1946 all high denomination bank notes shall, notwithstanding anything contained in section 26 of the Reserve Bank of India Act, 1934 (II of 1934), cease to be legal tender in payment or on account at any place in British India.

"high denomination bank note" was defined as a bank note of the denominational value of five hundred rupees, one thousand rupees or ten thousand rupees.

The higher denomination bank notes in Rupees 1000, 5000 and 10000 were reintroduced in the year 1954, and these bank notes were again demonetised in January 1978 by The High Denomination Bank Notes (Demonetisation) Act, 1978 , which had similar provisions like the 1946 Ordinance.

3. High denomination bank notes to cease to be legal tender.-On the expiry of the 16th day of January, 1978, all high denomination bank notes shall, notwithstanding anything contained in section 26 of the Reserve Bank of India Act, 1934 (2 of 1934), cease to be legal tender in payment or on account at any place.

"high denomination bank note" means a bank note of the denominational value of one thousand rupees, five thousand rupees or ten thousand rupees ;




In 2008 - TIOL-DDT 940 - 29.08.2008, I wrote in my daily column, DDT

The Rs. 10,000/- note of 1954 must be worth a Crore now! So there is nothing wrong in having a note of Rs. 1 Crore now.

But before that, if we are serious about unearthing or rather killing black money, may be the Rs. 500/- and Rs. 1000/- notes have to be demonetised.

And that happened on the 9th November, 2016. There was no Act or Ordinance for the 2016 demonetisation; it was done by a notification signed by a Joint Secretary which stated that:

the Central Government hereby declares that the specified bank notes shall cease to be legal tender with effect from the 9th November, 2016

and the specified bank notes were defined to be

bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees.

On 09.11.2016, I wrote, The Modi-Fication of Money in DDT 2967

In   1978, the Government had demonetised the thousand rupee note. At that time my income for two months was less than a thousand rupee note and I had never seen a thousand note, nor did I know anyone who did let alone own one. Yesterday the thousand-rupee note is gone. I don't know anyone who doesn't have some of those notes .

On 17.11.2016, I wrote in DDT 2972

Bribe in Brand New Notes

It  took less than a week to find the new notes in the bribery chain. NDTV has reported that two officers of the Kandla Port Trust have been arrested for taking a bribe of Rs 2.9 lakhs. What surprised even the Anti-Corruption agency was that the entire money was in the new 2000 rupee notes!

Earlier it was reported that an assistant in a Zilla Parishad in Maharashtra was arrested while accepting a bribe which contained 17 new 2000 rupee notes. Three employees of Madhya Pradesh State Government were arrested on Tuesday - and they had five 2000 rupee notes. In this case, interestingly, the ACB asked the complainant to arrange for the new notes as taking old notes may not amount to corruption! But in Maharashtra three officers were arrested even for taking the demonetized currency as bribe.

It seems the cops in some cities do not accept the new 2000 rupee note for payment of fine, but a couple of hundred rupee notes as bribe is welcome.

I was in distant Shillong yesterday where a small time businessman told me hopefully that the Modi Government has brought down bribes to a reasonable 4 digit figures from the astronomical amounts and that itself is a good sign.

On 18.11.2016, in DDT 2973, I wrote

Demonetisation - Not a rupee to exchange - Not a word of complaint

I met this girl Sumitra in Cherrapunjee yesterday. It rains in Cherrapunjee, not notes, but plain water. She told me on 9th November, she did not have a single 500 rupee note or 1000 rupee note and she doesn't have any money in any bank. On a good day she makes about 500 rupees selling snacks to tourists. She is married and has two children. Her business enterprise is shattered because of demonetization. Smart people from the cities are eager to pass on their useless 500-rupee notes to her. I saw at least two persons telling her that they didn't have any money other than the 500-rupee notes. But she is firm - they are not legal. And the rich customers who were lying, produced 100 rupee notes.

She has no remorse; no complaint and she doesn't blame the Government; doesn't expect the government to help her. "Why should the government help me", she asks me, "I am healthy; I can stand on my own feet." She believes that the 'inconvenience' will be only for a short time and good days are ahead. Her children study in an English Medium School and she has faith that they will have a bright future - for that she is prepared to work hard and is proud of her work. She was prepared to give me a discount of ten rupees on my bill but flatly refused to take the excess ten rupees I offered her. She even invited me to her house. I am honoured! Here is my co-citizen who is so confident and who doesn't expect anything from the government, even in a crisis. I look so little before her. You wonder how I communicated with her. This girl who studied up to the tenth class speaks fluent English. I wish she could be enlisted to draft some of our laws.

On 22 11 2016, in DDT 2975, I wrote

There was a time when many people in the country did not know who the Prime Minister was. It is said Morarji Desai visited a village and asked one of the villagers if he knew who was ruling the country.  "yes" , replied the villager. Morarji Bhai was happy that he was known even in the remote villages. On being asked as to who the ruler was, the villager replied,  "Lord Ram" !

Last week, I was in Mawsynram, a tiny village in remote Meghalaya, which reportedly receives the highest rainfall in the country. And everyone I met in this village knew Narendra Modi as the Prime Minister who performed the vanishing trick on the 500 and 1000 rupee notes right across the country.

I spoke to several people - a taxi driver in Kolkata, tea sellers outside the Kali temple in Kolkata, a mahout & an elephant owner in Kaziranga National Park, priests & pretty girls in Guwahati. People were facing a lot of difficulties and business has come down to less than half, but life seems to be going on normally with the irrepressible Indian as cheerful as ever. I went to an EXPO in Guwahati and found a large number of people queuing up to buy entry tickets. I went to an expensive hotel in Guwahati and found the place full with people drinking merrily to the sound of live music. I ate in a cheap wayside motel and was told that business was difficult but life was okay.

But I found the 'legal tender' had no takers and the demonetised currency was in full circulation. Nobody was prepared to accept the new 2000 rupee note, not even a Star Hotel, but everyone was more than willing to take the old 500 and 1000 rupee notes. I had to pay a thousand rupees for a boat to ferry me to the Umananda temple on an island in the Brahmaputra. My taxi driver who bargained the deal with the boatman asked me what currency notes I was going to pay the boatman. I was told that he would not take the 2000 rupee note; then I agreed to pay 100 rupee notes. The driver took my ten 100 rupee notes and gave a thousand rupee note to the boatman.

The ingenuity of the Indian knows no bounds. A small time trader outside the temple told me that some rich people threw away currency notes into the Brahmaputra. How nice it would have been if they had given it away to poor people like her. She said 30,000 rupees would solve all her problems and one of her fantasies is that like the newspaper thrown at the door, one day God will ensure that a bundle of 30,000 rupees lands up on her doorstep and till then she is happy to bear with Modi's money mantra.  "after all he means good for the country" , she adds smilingly.

A tea vendor told me,  "we had no money on 9th November and we have no money now, I sleep happily."

"Old or new or no notes, I will not let my elephant go hungry," said a mahout to me in the Kaziranga National Park

DDT 2978 25 11 2016 mentioned,

Macroeconomic effects of demonetisation are unknown - Tim Worstal

Adam Smith Institute Fellow, Tim Worstal has commented on Dr. Manmohan Singh's speech in Parliament yesterday:

Manmohan Singh, the former PM, has said that India's demonetisation program will cut 2% from GDP. This is of course entirely possible-but it's very far from certain. Yes, of course, there will be disruption from the change in the Rs 500 and Rs 1,000 notes. We can all see that with our own eyes just by looking at the queues at the banks. We can also have the most lovely arguments about whether it is worth it or not, in the sense that very large numbers of Indians think the economic system is weighted against them and therefore they welcome the move. And that would have beneficial effects in the future as trust in the fairness of the system is a vital part of it being a successful economic system.

We know very well that there are processes going on here which will indeed shrink the economy. That chaos at the banks for example. But there are, as there always are, other processes going on too. And some of those will tend to grow the economy-that greater belief in fairness in the future perhaps. We don't know what the balance between the two sets of processes will be.

For example, the flood of money into the banks will lower interest rates and inflation, both of which should spur real GDP growth. We even have an effect here which no one, absolutely no one at all, even knows the sign of, positive or negative. That's the effect upon the money supply.

We just don't know what the effect on the broad money supply of demonetisation is. It could be to shrink it, which will, other things being equal, shrink the economy. It could increase it (if black money changes hands much less often than white) and thus boost economic growth.

We really, really, just don't know.

I still don't know

Until Next Week.