On demonesitation, will Modi do a Morarji or a Pandit-ji?
A brief history of the Gold Control Order issued by intransigent finance minister Morarji Desai reveals some interesting insights.
The government’s decision to demonetise Rs 500 and Rs 1,000 notes has rightly been described as an unprecedented move. It is difficult to think of any other economy that has been subjected to such an extraordinary measure in ordinary times. While there is no exact parallel, there is an instance in our own history that bears comparison: the Gold Control Order of 1963. And this comparison is instructive at many levels.
On January 9, 1963, finance minister Morarji Desai announced in a nationwide broadcast that starting the next day the possession of gold — barring personal ornaments — without declaration would be illegal. A Gold Control Board was established with wide powers of investigation and seizure of persons as well as confiscation of gold. A comprehensive industry-wide regulation was also introduced. Its centrepiece: a ban on making and selling of jewellery above 14 carats, as against the prevailing trend of 22-carat ornaments.
As with the ongoing demonetisation, the policy was effectively decided by one leader who consulted few experts. This was partly because of the need to maintain secrecy and partly because Desai knew his own mind. Those who were taken into confidence turned out to be as enthusiastic about the move. Prominent among these was Chief Economic Adviser IG Patel.
Then, as now, the underlying considerations for this move were wholly worthy. As Desai explained, the country was losing foreign exchange worth Rs 500-600 million every year owing the smuggling of gold. This foreign exchange was crucial for financing the development of India. He was convinced that only by curbing the demand for gold in India could smuggling be drastically contained. Against the backdrop of the war with China and declaration of national emergency, Desai felt the time was right to push through such a measure. The upsurge of patriotic sentiment would help tide over any short-term pain. He prevailed upon Prime Minister Nehru, who was distracted and reeling under the impact of the Chinese attack.
Issuing the order proved to be the easiest part. Patel would subsequently admit that the effort to control the making and selling of gold ornaments “failed, and failed miserably.” Ornaments were made in thousands of small establishments across rural and urban India. It proved impossible to monitor or licence this huge unorganised industry or to cut it off from the circulation of smuggled gold. The government had also failed to anticipate that the making of 14-carat ornaments would require new equipment, technology and chemicals. In consequence, a large number of small goldsmiths were thrown out of work while the larger players managed to adapt. Soon, the government faced countrywide protests by these goldsmiths.
The Order also met with considerable social resistance — not least because of harassment by freshly empowered officials. Moreover, gold served many purposes in India: A hedge against inflation, security to women without access to property, a status symbol. Weaning Indians off gold proved a lot trickier than Desai had anticipated. Above all, as Patel later conceded, was the “paramount question of individual freedom: what rights has the Government to interfere with people’s personal preferences?”
The Opposition parties pounced on the government on these counts. The Jan Sangh and Swatantra Party, the Socialists and the Communists came together to attack the policy. Writing in Swarajya magazine, C Rajagopalachari thundered against the government’s “dacoity”: “the jewels and gold of our womenfolk have attracted…greedy eyes”. Gold, he insisted, was the “honest and industrious family’s village-bank, with no difficult forms and inaccessible counters for the illiterate.”
Desai was impervious to such considerations. In another nationwide address in July 1963, he admitted that large numbers of goldsmiths were unemployed but blandly insisted: “Ours is a large country and numerous opportunities are either available or can be created.” He claimed that 99% of the population had no use for gold and those who did could manage with 14 carats. “This, really, is no sacrifice but only a service to the country.”
The Congress , however, was unwilling to toe this line. Faced with popular and political opposition, Nehru leaned on Desai to make concessions. Desai was forced to allow self-employed goldsmiths to repair and remake ornaments of more than 14 carats. But this tore a gaping hole in the Order and made its implementation more difficult. Soon after Desai himself was eased out of Cabinet under the so-called Kamaraj Plan. Indira Gandhi eventually revoked the Order in 1966.
However, Desai made a comeback as finance minister under Mrs Gandhi following her poor showing in the elections of 1967. In 1968, he pushed through a Gold Control Act, which built and expanded on the Order. The upshot was not a reduction in demand for gold but a huge spurt in smuggling and the development of a hawala market to finance it by remittance. The Act and its baleful consequences remained intact until VP Singh’s government repealed it in 1990.
The history of the Gold Control Order suggests that the government can take one of two tacks when a well-intentioned policy turns out to be ill-conceived and tardily executed. It could take a pragmatic decision like Nehru, accepting that the short-term costs were outweighing any potential benefits.
Or it could rigidly insist like Desai that lives of millions can be programmed by executive fiat and end up fostering perverse behaviour and outcomes. It remains to be seen which, if any, of his predecessors Prime Minister Modi will end up emulating.
Srinath Raghavan is senior fellow, Centre for Policy Research, New Delhi.The views expressed are personal.