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Supreme Court’s Verdict on Demonetisation


Recently, A majority of four judges on a Constitution Bench of the Supreme Court  found no flaw in the Union government’s process to demonetise ₹500 and ₹1,000 banknotes through a Gazette notification issued on November 8, 2016.


GS-III: Indian Economy (Fiscal Policy, Government Policies and Initiatives)

Dimensions of the Article:

  1. What is the Supreme Court’s verdict on demonetisation?
  2. Why was demonetisation challenged?
  3. About the Demonetization in 2016
  4. Impact of demonetization

What is the Supreme Court’s verdict on demonetisation?

Majority judgment:
  • In its majority 4:1 judgment, it was held that the Centre’s notification dated November 8, 2016, was valid and satisfied the test of proportionality.
  • The central government’s decision was after RBI board’s approval which shows in-built safeguard against centre’s powers.
  •  It cannot be said that there is excessive delegation of power under the RBI Act to the Centre which is answerable to the Parliament.
  • The Centre is required to take the action after the consultation with the Central Board and there is an inbuilt safeguard. There has to be great restraint in matters of economic policy. The court cannot supplant the wisdom of executive with its wisdom. Decision-making process cannot be faulted merely because the proposal emanated from the centre.
Dissenting judgement:
  •  Justice B V Nagarathna said while the measure was “well-intentioned”, it was to be declared “unlawful purely on legal grounds”.
  • “The record demonstrates there was no independent application of mind by the RBI. There was no time for the bank to such an independent application of mind,” .
  • “As per Section 26(2), the proposal for demonetisation is to emanate from the central board of the RBI. Demonetisation of all series of notes at the instance of Central Government is a far more serious issue than the demonetisation of particular series by the bank. So, it has to be done through legislation than through executive notification,”.

Why was demonetisation challenged?

  • Taking up the batch of 58 petitions challenging various aspects of the government’s note ban decision, the Supreme Court had initially wondered if it had not become merely an “academic debate” given the passage of time. It later decided to go into the issue, with the petitioners contending that the procedure prescribed in Section 26(2) of RBI Act, 1934, was not followed.
  • Section 26(2) of the Act states that “on recommendation of the [RBI] Central Board, the Central Government may, by notification in the Gazette of India, declare that, with effect from such date… any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification”.
  • Congress leader and Senior Advocate P Chidambaram argued that as per the particular section, the recommendation should have emanated from the RBI, but in this case, the government had advised the central bank, following which it made the recommendation. He said when earlier governments had demonetised currency — in 1946 and 1978, they had done so by way of a law made by Parliament.
  • He also accused the government of withholding documents related to the decision-making process from the court and raised doubts about whether the quorum as required for the RBI Central Board meeting was met.

About the Demonetization in 2016

  • Demonetisation is an act of withdrawing the status of currency as legal tender. It occurs whenever national currency of a country is changed.
  • According to Reserve Bank of India (RBI), currency with public is defined as “Total currency in circulation minus cash available with banks”. Currency in Circulation is defined as cash or currency available within a country for the purpose of conducting transactions between consumers and businesses.
  • Under this act, current form or forms of money is pulled from circulation and are replaced with new notes or coins.
  • Demonetisation was announced by Prime Minister Narendra Modi in 2016. With this move, Rs 500 and Rs 1,000 currency notes were withdrawn as a legal tender across the country. This move was aimed at eliminating black money.
  • Demonetisation is done with the objective of:
  • Discouraging the use of high-denomination notes for illegal transactions. It curbs the use of black money.
  • Encouraging digitisation of commercial transactions and formalising the economy. Thus, it boosts government tax revenues.

Impact of demonetization

  • Unlike the limited impact of similar events in 1946 and 1978, the latest demonetisation in 2016 resulted in widespread disruption in the economy, whose aftershocks are still being felt by society.
  • The majority of observers have opined that this policy was a failure as only a fraction of its declared objectives could be achieved.
  • Interestingly, more than 99.3% of cash returned to the system, pointing towards money laundering routes.
  • Rubbing more salt to the wound, data shows that the cash in circulation now exceeds even the pre-demonetisation levels.
  • On November 4, 2016, currency with public was around Rs. 17.97 lakh crore which declined to Rs 7.8 lakh crore in January 2017 following demonetisation.
  • Demonetisation led to liquidity shortage in economy. Post demonetisation, demands fell, businesses faced a crisis and gross domestic product (GDP) growth decreased to 1.5%.

-Source: The Hindu, Indian Express

December 2023