Fact check: Did Indira Gandhi really shy away from demonetisation as Narendra Modi claimed?

Did former Prime Minister Indira Gandhi refuse to implement demonetisation in 1970-’71? A recent statement made by Prime Minister Narendra Modi in a meeting with party MPs suggests that Gandhi failed to take the initiative 45 years ago, thus precipitating India’s economic crisis arising out of the proliferation of black money.

Referring to Unfinished Innings: Recollections and Reflections of a Civil Servant, written by former bureaucrat Madhav Godbole, Modi informed his party’s MPs that the Justice Wanchoo committee had recommended demonetisation as one of the measures to rein in black money. YB Chavan, who was finance minister at the time, met Indira Gandhi and sought her approval to accept and implement demonetisation. The book quotes Gandhi to having said, “Are no more elections to be fought by the Congress?” Modi said that this narrow-minded snub by the former prime minister forced Chavan to shelve any plans to demonetise higher-value currencies.

In recounting this anecdote, Modi’s aim was clear. The iron lady Indira Gandhi may have failed to bite the bullet but he is not going to be found wanting in taking tough and unpopular decisions as his government battles the effects of black money.

So what did Madhav Godbole write in his book?

Modi quotes Godbole correctly from a chapter titled My Years with YB Chavan. In this chapter, Godbole mentions the Wanchoo committee’s interim report and its recommendation to demonetise high denominated notes. Godbole goes on to describe Chavan’s meeting with Gandhi where he was rebuked, implying that it was pure electoral politics that was playing on her mind while rejecting the recommendation. Surprisingly, Godbole does not make any effort either to give the reader an insight of the political and economic conditions prevailing during the period with war-like situation looming between India and Pakistan over East Pakistan (present-day Bangladesh) and pins the entire blame on Gandhi’s socialist policies and her drive to make nationalisation of banks’ a success over other pressing matters.

If demonetisation was the need of the hour in 1971, it is not clear how as the former home secretary does not explain further and leaves readers to draw their own inferences based on a single anecdote without a proper context.

What was the economic context of 1970-’72?

It’s a well-documented fact that the 1971 Bangladesh war may have hurt Pakistan’s pride but set India back economically by several years. The seeds of the 13-day war ending in December 1971 were sown in March that year and nearly 10 million refugees poured into India. The Indian government was compelled to protect and provide for them on humanitarian grounds. This resulted in more taxes for the Indian taxpayers to fund the aftermath of the war and also resulted in economic turmoil.

Various estimates point out that for the year ending March 1972, the cost of managing refugees from Bangladesh were in the range of $800 million, thus impacting spending on development work in the country. The Hindu points out that “in 1962-’63 [with the war with China], the economy grew by only 2 per cent, in 1965-’66 [with a war with Pakistan) growth was a negative 3.7 per cent and in 1971-’72 [the Bangladesh war] it was as little as 0.9 per cent. All three years witnessed a deceleration and it took a couple of years before the economy recovered.”

The economic situation prevailing in the decade between 1961-’72 was not a time when any prime minister could have dared to undertake a potential economic disruptive move like demonetisation. In addition, Indira Gandhi was already under pressure to deliver results after nationalising 14 commercial banks in 1969, followed by six more banks in 1970.

Quantum of high denomination notes since 1971

A Reserve Bank of India report points out that on a decadal average basis, the currency-GDP ratio remained stable during 1970s to 1990s at around 10.5%. One particular denomination, Rs 100 accounted for close to 50% of the value of the total currency in circulation throughout the three decades 1970s to 1990s. In 1971, the share of Rs 100 notes stood at 49.6% while the share of Rs 1,000 notes stood at 1%.

With Rs 500 and Rs 1,000 emerging as substitutes, its share declined to 14.8% in 2010-’11.The share of Rs 10, the second most important denomination during the 1970s, progressively declined in importance from 34.3% in 1970-’71 to 2.2% by 2010-’11.

Rs 100 in 1971 would currently be valued at Rs 3,100 after adjusting for average yearly inflation of 7.99% over the last 45 years.

Who was Justice Wanchoo & what was his committee’s agenda?

A look through the archives across various government documents and books written on tax reforms around the 1970s and ’80s throw up a number of interesting details. After retiring as the Chief Justice of India in 1967, Justice K N Wanchoo was appointed in March 1970 to head the Direct Taxes Enquiry Committee. The Committee submitted its interim report in December 1970 and the final report in December 1971.

The main objectives of the committee were to suggest concrete measures to unearth black money and prevent its proliferation and steps to improve tax compliance.

Justice Wanchoo did not mince words when it came to black money, which his panel estimated to be around Rs 1,400 cr in 1968-’69. “Black money is like a cancerous growth in the country’s economy, which if not checked in time, will surely lead to its ruination,” the committee observed.

But the committee had very definite recommendations, from which the present Modi government could still draw inspiration.

1. Regulating donations to political parties: The committee observed that the biggest cases of black money were in the context of political funding and hence donations made to political parties should be monitored and regulated. The committee disagreed with the practice of corporate funding to political parties and wanted the government to finance them. They also recommended that parties should audit and publish their accounts annually.
2. Voluntary Disclosure scheme: The Wanchoo Committee displayed a special dislike for voluntary disclosure schemes, which they felt fails to achieve the intended purposes of unearthing black money and provides hoarders an easy way out to invest their hidden cash. Despite its displeasure, the Indira Gandhi government in 1975 announced a voluntary disclosure scheme and a sum of Rs 746 crores was recovered as a consequence of the fear among hoarders post-Emergency. But subsequent governments including the Congress failed to capitalise on these gains.
3. Reducing tax rates: From a maximum income tax rate of 97%, the committee recommended the reduction of maximum income tax to 75%. The committee also recommended substantial reductions for the middle- and the lower-income tax payers.
4. Plugging loopholes due to Hindu Undivided Family trusts: Taking the bull by the horns of what has been a politically sensitive topic in Independent India, the panel saw the existence of the Hindu Undivided Family as a means to avoid paying tax. They suggested several measures to plug these loopholes.
5. Agriculture Income tax: Income from agriculture should also be taxed like other income by the Central government, even if it needs amendment to the Constitution.

Nearly five decades have passed since the supposed conversation took place till the Prime Minister Narendra Modi decided to revive the idea. Since the controversial decision was announced on November 8, the Bharatiya Janata Party has been under pressure, both from the Opposition as well as its own party members as serpentine queues and depositors falling dead have dominated the news headlines.

Justice Wanchoo may have recommended demonetisation but it would have been difficult for any prime minister to have taken the decision in 1970-’71 with poverty, unemployment and years of economic turmoil at an all-time high.

This article first appeared on BOOM.