Historically, the demonetisation of currency notes in India has been invariably linked to Gujarat and its politicians. In 1978, when the Morarji Desai government had decided to invalidate the currency notes of Rs 1,000, Rs 5,000 and Rs 10,000 denomination, the then Finance Ministry was headed by a strong-headed civil servant from Gujarat – Haribhai M Patel.
Patel had served India’s first Deputy Prime Minister and Home Minister Sardar Vallabhbhai Patel for a long time. His no-nonsense demeanour endeared him to an equally taut prime minister in Desai. Incidentally, Desai, in his role as chief minister of the state of Bombay (a large state created at the time of Independence which comprised of present day Maharashtra and Gujarat) and Patel, as a civil servant, were aware of people’s fascination with cash in their home state.
In the post-Emergency phase, the Janata Party essentially rode on the popular wave against corruption and nepotism in the Congress party, and on the authoritarianism of Indira Gandhi. In people’s perception, the Janata Party was mandated to end corruption in high places by initiating some radical measures, as promised before the polls.
Though he held a pro-capitalist and liberal view of the economy, Desai was absolutely intolerant towards corruption and criminals in politics. At the instance of Patel, Desai agreed to go ahead with the ban on currency notes of Rs 1,000 and above in denomination.
There is a world of difference, however, between the demonetisation of 1978 and now. The middle class in 1978 was not only sparse but also lived mostly within the modest income bracket. A large section of this class had no access to high denomination currency notes, that began with Rs 1,000 and went up to Rs 10,000.
Much of the currency notes of high denomination in those times were stocked by businessmen. In Kanpur, and several other trading centres, reports emerged that businessmen, instead of declaring their black money in the banks, were using the currency as waste paper. Since the quantity of this high denomination currency was very limited, such stories made for great headlines.
Contrast this with today’s situation, and you will quickly realise the difference. Notes of Rs 500 and Rs 1,000 denominations are much more prevalent than even the smaller currency notes. In ATMs across the country, high denomination notes are the only available legal tender and this has practically pushed the smaller denominations out of circulation. With the preponderance of higher denomination currency, it became normal to transact in these notes across the social spectrum.
The most sinister aspect of the dominance of higher currency notes, however, pertained to the growth of terrorism and the spurt in corruption. For instance, Pakistan’s Inter Service Intelligence (ISI) took advantage of the situation by introducing a large chunk of counterfeit currencies all over the country – to fund terrorism and spread radicalisation.
A special cell of the Central Bureau of Investigation (CBI), that deals with counterfeit currency, came across many instances where bags of fake notes were being pushed from Bangladesh into India – in West Bengal and the North Eastern states – in order to finance insurgency. Despite the best efforts of the Indian security agencies, it seems that it is rather impossible to purge the economy of counterfeit currencies without employing such a drastic measure.
A much deeper malaise was also evident in politics, where corruption effectively subverted the system. Recall the US diplomat's cables that were revealed on WikiLeaks, exposing the cash for vote scam at the fag end of Manmohan Singh’s term as prime minister. The US diplomat recounted how he was shown boxes full of cash, to be used as bribes for members of Parliament.
Similarly, there were stories of machines being used in Noida and Lucknow by agents of political parties, to count the notes received in suitcases and bags as bribes. Much of these stories are based on credible evidence. The unsavoury episode in February involving the arrest of Noida's chief engineer, Yadav Singh, on malfeasance was a symptom of this very syndrome.
In the present political context, Modi’s bold move of demonetisation entailed a great risk. The BJP’s capacity to raise funds for the upcoming elections would be grossly limited in view of these restrictions. Like other parties, the BJP is as much infected by black money and corruption. Similarly, in Modi's home state of Gujarat, where Assembly elections are due shortly, the ban on currency notes would go against the grain of traders who have the tendency of stocking money.
The move is bound to evoke a strong sense of hostility from a powerful moneyed section of Gujarat. But this is not the first time that Modi would be ranged against the influential and moneyed sections in Gujarat. A veteran of many such battles, Modi knows how to turn the tide.
Much has changed between 1978 and 2016. Modi, though a Gujarati, is now far more pragmatic and powerful in realpolitik than Desai, who was constantly weighed down by satraps like Charan Singh and his acolytes.