Demonetisation fever likely to continue in early part of the year.
Prof Chinmay Tumbhe of IIMA is bringing us interesting insights from India’s economic and business history.
In a recent piece, he points to lessons from Hyderabad Currency reform. State of Hyderabad had its own central bank (State Bank of Hyderabad) and own currency (Osmania Sicca, also this). After joining Indian Union post-Partition (amidst huge chaos), their currency had to be replaced by Indian Rupee.
By 1948, Hyderabad state, covering districts in modern Telangana, Maharashtra and Karnataka, was the only major princely state to have its own legal tender – the Hali or Osmania Sicca. The currency was used by nearly 20 million people spread over 20,000 villages and towns, mainly as coins but also as paper notes of varying denominations. An exchange rate of roughly 116 Hali Sicca rupees to 100 British Indian rupees had lasted for nearly a century under the Asif Jahi Nizam rule with only minor fluctuations. Counterfeits were not unknown as sensational cases of coin forgeries and theft of high-denomination Hyderabadi currency notes printed by Waterlow & Sons in England often created newspaper headlines.
The Hyderabadi currency was demonetised in three phases. First, Indian currency became legal tender in Hyderabad state from January 26, 1950, alongside Hyderabadi currency. By January 1953, 50% of the Hyderabadi currency had been withdrawn from circulation without any formal announcement of demonetisation as banks had converted their accounts into Indian currency and were issuing more of this than Hyderabadi currency.
The second step of the demonetisation process came with an announcement in March 1953 that the legal tender of the Hyderabadi currency would expire two years later on April 1, 1955. The gradual nature of demonetisation was justified as a considerable part of the Hyderabadi currency was still in circulation and to avoid “hardship that would be caused to the people by sudden withdrawal of the currency” (Times of India, March 29, 1953). Three weeks after this announcement, it was noted that there had been “no rise in prices as a result of demonetisation” and that 5% of the outstanding currency had been exchanged. There was, however, pressure from union leaders to conduct strikes seeking parity in wages in Indian currency, effectively demanding a 16% hike in pay. Over the next two years, these concerns were placated through various means and by the establishment of industry-wise wage boards. Separately, hoarders of coins were warned and profiteers punished under the slogan One People, One Country, One Currency. By April 1955, over 85% of the outstanding currency had been exchanged. A slight rise in prices was noted in that month due to a recalibration of Hali rupee prices to the higher-valued Indian rupee prices for certain goods.
After cancelling legal tender, the third step involved further extensions to the exchange period, on public request, till June 30, 1959. The only serious disruption and uncertainty in this entire episode was faced by the Hyderabad Mint, which eventually found itself a new role on the minting map of India.
Other gradual demonetisation exercises in India carried out in some of the smaller princely states and for the escudo in Goa, Daman and Diu (invalidated on May 15, 1962) also appear to share similar experiences of negligible economic disruption.
Based on this Prof Chinmay argues for a more gradual demonetisation and not the abrupt one we just did.
Though, the comparisons are not exact. Hyderabad had to move to Indian Rupee much like Pakistan moved away from Indian rupee. Infact, the experience of Hyderabad is more like European countries which moved away from own currency to a centralised one of Euro. These were cases of no choice but to move to a new currency.
What India did in 2016 was to declare its existing legal tender of Rs 500 and Rs 1000 notes as illegal tender just like it did in 1946 and 1978. In 1946 and 1978, the ordinances were called as demonetisation ordinance but this time the regulators have used the term – Withdrawal of Specified Bank Notes.
So, previously it was clear that the government demonetised as it thought that the high denomination notes for preventing illegal transfer of wealth.
THE HIGH DENOMINATION BANK NOTES (DEMONETISATION) ACT, 1978
ACT NO. 11 OF 1978 [ 30th March, 1978.]
An Act to provide in the public interest for the demonetisation of certain high denomination bank notes and for matters connected therewith or incidental thereto.
WHEREAS the availability of high denomination bank notes facilitates the illicit transfer of money for financing transactions which are harmful to the national economy or which are for illegal purposes and it is therefore necessary in the public interest to demonetise high denomination bank notes;
This time there are multiple objectives and not clear what is the actual goal. Towards the end, the government shifted goal towards digital payments which was not even mentioned as one of the original objectives.
Moreover, this time RBI Board has been called to pass this move which has been questioned. RBI has lost a lot of credibility in the process and is shocking to see the decline of the institution in such quick time.
To sum up, all the episodes of previous demonetisations or currency withdrawals in India and outside pale in comparisons with the 2016 one. Whether one likes it or dislikes it, it is surely a huge event in global monetary history.