NEW DELHI

‘The economy in 1978 was much smaller’

Losing hope:A vendor waits for customers at the Azadpur Mandi on Sunday.Photo: Sushil Kumar Verma

Losing hope:A vendor waits for customers at the Azadpur Mandi on Sunday.Photo: Sushil Kumar Verma  

Back then the economy was not open and circulation of high-value notes was a fraction of what it is today: experts

The government’s current demonetisation drive cannot be compared to the one conducted in 1978, say experts, since the size of the economy was much smaller back then, and the circulation of high-denomination notes was a fraction of what it is today.

In 1978, the government had demonetised Rs. 10,000, Rs. 5,000 and Rs. 1,000 notes, while the current government has demonetised Rs. 1,000 and Rs. 500 notes.

However, it has also introduced new Rs. 500 notes and the higher denomination Rs. 2,000 note.

A new Rs. 1,000 note will also be introduced soon, say Finance Ministry officials.

‘Economy was not open’

“The economy in 1978 was much smaller than it is now, and the extent of black money was a lot less,” said Rajiv Kumar, senior fellow at the Centre for Policy Research.

“The orders of magnitude were different. The economy was not open and globalised, so things like hawala transactions were much less.”

Mr. Kumar added that the high-value notes were a minuscule proportion of the money in circulation at the time, whereas Rs. 500 and Rs. 1,000 notes together made up 86 per cent of the money in the system prior to Prime Minister Modi’s November 8 demonetisation announcement.

Comparison meaningless

These points have been reiterated by Union Finance Minister Arun Jaitley as well, who recently said that comparison with the 1978 demonetisation drive was meaningless because of the difference in the sizes of the economy, the black economy, and the share in circulation of high-value notes.

According to Mr. Jaitley, high-value notes made up less than 10 per cent of the value of the notes in circulation in 1978.

Approximation of growth

The numbers seem to back up this assertion. While it is difficult to compare the GDP today to that of 1978 due to the many changes in methodology of calculation since then, there are other metrics in place that can be used to arrive at a close approximation of the growth between then and now.

According to the Reserve Bank of India, back in 1978, there were Rs. 8,800 crore worth of notes in circulation just before the demonetisation.

This figure stood at Rs.16.4 lakh crore as of end of March 2016, showing how the economy has swelled.

Another indicator of economic growth is the government’s tax collections, which ballooned from a little over Rs. 10,500 crore in 1978-79 to Rs. 14.6 lakh crore in 2015-16.

“An easy way to see how the value of currency has changed over the years is to look at how much gold the same amount of money can buy you,” Mr Kumar added. One Rs. 1,000 note could buy 14.6 grams of gold in 1978, compared to the 0.33 grams a day prior to Mr. Modi’s announcement on November 8.



Rs. 8,800 crore




1978 – Rs. 10,500 crore



2016 – Rs. 14.6 lakh crore




1978

1978 – Rs.685 for 10 gm

2016 – Rs.30,170 for 10 gm




High-value notes made up less than

10 per cent of the value of the notes in circulation in 1978



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