Demonetisation through historical lens

A retrospective of the 2016 demonetisation move in India, delving into the emotional impact on society, the economic consequences, and its historical context, while also comparing it with previous demonetisation attempts.

Demonetisation Effect; Source: The Economic Times

It was a regular Tuesday on November 8, 2016. As the day turned into evening and the world watched the United States of America vote for a new president, the citizens of India awaited an unanticipated national announcement to be made by Prime Minister Narendra Modi at eight o’clock in the evening.

There was no indication of what the public address was about. Even when Prime Minister Modi appeared on people's television sets, he created suspense by discussing India's economy and the impact of corruption and black money in general. In fact, it took PM Modi a full ten minutes and approximately one thousand words to say what he was there to say:

"The five hundred rupee and thousand rupee currency notes presently in use will no longer be legal tender from midnight tonight, that is 8th November 2016."

And with that one sentence,the nation was thrown into a state of confusion and chaos. The sudden withdrawal of 86% of the currency in circulation led to people scrambling to exchange their old notes for new ones. Banks and ATMs ran out of cash, and their was a state of ruckus all over the country. Businesses struggled as cash flow restrained, and daily life became a struggle for many.

The citizens were left wondering, why would their elected leader do such a thing?

The Prime Minister had a plan, you see. He and some experts felt that the repercussions of demonetisation were temporary inconveniences to combat the evil forces of corruption, black money, and counterfeit currency that had been plaguing the nation for far too long. But this was not the first time the nation had undergone such a drastic change.

In 1978, the Janta Party government led by Prime Minister Morarji Desai had decided to cease the usage of high denomination bank notes in a bid to combat corruption and black money through the enactment of the High Denomination Bank Notes (Demonetisation) Act. But the impact was limited because of one particular difference—the value of money. In 1978, a thousand-rupee-note could buy a five square feet of real estate space in south Bombay, but in 2016, a five-hundred-rupee-note could not even buy a hundredth of a square foot in that area. The notes had such a huge monetary value that common people did not own them like they do these days.

Not only that, but demonetisation has a colonial precedent. In 1946, the British Raj implemented its own version of demonetisation to combat black marketeers and tax evasion while the globe was just emerging from the shock of the Second World War and India was at the height of the anti-colonial movement. All banknotes worth five-hundred-rupees or more were demonetised under the High Denomination Bank Notes (Demonetisation) Ordinance. However, the move was deemed a failure because it only caught a small number of black marketeers or tax evaders.

So you see, demonetisation is not a new concept in India's history. Each time it has been used as a tool to curb corruption and black money, but the execution and consequences have varied. The demonetisation of 2016, in particular, had a significant impact on the economy and the daily lives of citizens.

Though its long-term effects are still being studied and debated, the government's intention behind demonetisation was noble: to curb corruption and to move towards a cashless economy. But as with any major policy change, the execution and implementation play a crucial role in determining its success. The history of demonetisation in India serves as a reminder of this and highlights the need for careful planning and execution when tackling such a complex issue.