Demonetisation of five hundred and one thousand rupee notes is one of the game changers. At one stroke, tax evaders and other such people who were not keeping their wealth in gold, land or dollars were dealt a lethal blow. Some could distribute currency to their relatives or servants, but for the larger operators, this had very limited scope. There has been the discussion that demonetisation was also done in 1978, around forty years ago. Having prepared the first Perspective Plan for an Indian State in Gujarat at the Sardar Patel Institute in 1972, I was invited by the Planning Commission to head its very powerful Perspective Planning Division (PPD). The Gujarat Plan in three volumes had a Technical Forecasting Model for the year 2000 which was in those days considered as an ‘innovation’. It was decided to replicate it for the regional part the Country’s plan. My predecessor at Delhi had been the iconic Pitamber Pant, a friend of Indira Gandhi who used to mark PPD files on which I worked, to her as ‘from Pitamber to Indu’. In 1978, having completed five years, I wanted to come back to my research job at the Sardar Patel Institute of Ahmedabad. But as fate would have it, my predecessor at Ahmedabad, the senior economist D T Lakdawala, the Director of the Bombay School of Economics was appointed as the Deputy Chairman of the Planning Commission and of course, he insisted that I stay back at Delhi.
Prime Minister Morarji Desai decided as Gujarati Prime Ministers do, to demonetise high-value notes. In those days he took up a really high value one, namely the one thousand rupee note. I vividly remember a conversation then which has a contemporary relevance. I G Patel, the then Governor of the Reserve Bank of India, told Prime Minister Morarji Desai in chaste Gujarati, ‘Sahib, this (the demonetisation of the thousand rupee notes) will not work, black money is held in land, gold, and dollars because they appreciate in value and not in currency’. The late H M Patel, the then Finance Minister was present and was smiling away at this exchange. Morarjibhai would have none of this and went ahead with demonetisation.
When we now talk about that demonetisation episode of a thousand rupee notes, in some sense, as comparable to today, we make a great mistake. It has to be remembered that the currency cut off point then was much higher. In those days, the price of gold was around six hundred rupees for ten grams. It is now around thirty thousand rupees per ten grams. Since gold is a good measure of the value of the money in classical monetary theory, a thousand rupee note then would be worth roughly fifty thousand rupees now and so the coverage of demonetisation in the present exercise is much greater.