Demonetization: SC Judgement
- prepstreak
- Oct 11, 2023
- 4 min read
A recent Supreme Court verdict (January 2023) upheld the government's demonetization of ₹500 and ₹1,000 banknotes in 2016 with a 4-1 majority. The Constitution Bench found no issues with the process implemented through a gazette notification on November 8, 2016.
Petitioner Argument
Proposal was Not examined properly
Expression 'any ' inin section 26(2) means particular series of banknotes and not all series
Exercise of power was unlawful and arbitrary
The decision should have been a legislative decision and not an arbitrary executive decision
The Judgement - The Supreme Court identified six issues in the challenge to the government’s demonetisation decision. Both the majority judgment and the dissent gave their views on each of these issues.
Whether power available to central government under section 26 can be restricted to mean that it can be exercised for only some series or all series?
MAJORITY - The term any means all series. If only a few series can be demonetized , it will be absurd
DISSENTING VIEW - If "any "would mean all , it would confer excessive and arbitrary powers on the RBI.
Whether excess power is vested in the central government and RBI is conferring excessive delegation
MAJORITY - section 26 states that decision is taken on recommendation of central board which means that there is an inbuilt safeguard.
DISSENTING - Such decision should be through a plenary legislation, with a meaningful debate in parliament. It cannot be done just issuing a Gazette notification
Whether the decision making process was flawed?
MAJORITY - the minutes RBI central board meeting which recommended the demonetization itself stated that RBI and center had discussed the idea for over six months before it was notified .
Agility also stated that court cannot determine the effectiveness of economic policy however, it agreed with the center's contention that the decision had to be made in secrecy and in haste for it to be effective.
DISSENTING - Justice Nagarathna Held that it is in violation of section 26 of RBI act that the recommendation for demonetization originated from the centre and not from RBI central board. The centre had initiated the proposal, then it ought to have brought in legislation in parliament. If urgency and haste was necessary, then why an ordinance could not have been brought which could have been subsequently ratified by parliament.
Test of proportionality
MAJORITY - Applied a four pronged test of proportionality to the constitutionality of the decision. They are - a) legitimate purpose b)rational connection with the purpose (c)necessity (d) whether the action taken is proportional or balanced. Majority verdict states that curbing fake currency, black money and terror funding are legitimate interests of the state and have rational Nexus with demonetization.
DISSENTING - since she already felt it was unlawful, question needs no answering.
Whether the time provided for exchange of notes was unreasonable?
MAJORITY - the court cited earlier instance of demonetization in 1978 where a three day. Was provided for exchanging the demonetised notes.
DISSENTING - already conisdered demon as unlawful
NOTE - It is not relevant whether the objective was achieved or not. The judiciary was only deciding whether the right process was adopted. So top court decided that the decision making process was not flawed.
Reasons Behind Demonetization - To curb counterfeiting, terror financing, and black money
Effect-
Currency in circulation as % of GDP - was 11.55% and in USA 7.5%. PM had said more CIC is linked to corruption. BUT CIC jumped back to the same level and was 13% in 2021-22
There had been steep rise in higher denomination notes (500, 1000) in last 2 years. This was supposed to be main source of black money
RBI Affidavit had mentioned that maximum black money is held in the form of real estate assets and gold.
Final SC Judgement
January 2 - the Supreme Court upheld the government’s decision to demonetise currency notes of Rs 500 and Rs 1,000 by a 4:1 majority
Court also said it was a consultative decision of RBI and Govt
“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.”
This observation is being made having regard to the fact that the entire exercise of demonetisation of all series of bank notes of Rs 500 and Rs 1000 was carried out in 24 hours
The judge noted that “around 98% of the value of the demonetised currency notes have been exchanged for bank notes which continues to be a legal tender”
Inference
Like 1978 it was anticipated that lot of notes will not return (25% did not at that time).
Even though max black money operates in form of benami properties, jewelery yet cash is used for these transactions.
RBI stated - "the temporary hardship was part of nation building process "
Questions to Think
What if the minority judgement was the final judgement?
What do you think of the judgement?
Was it wrong for the public?
Which section of the act come into play? What is mentioned in that section?
Would you recommend some changes in that section?
Why so much delay?
Question of separation of powers. The judiciary should not have intervened?
Declaring the demonetization as unconstitutional would not have overturned the decision but the court has the right to decide whether the decision was a sound policy decision or not. It would have prevented future such decisions from taking place.
Justice BR Gavai - "limited judicial review power in matter of economic policy"
What other steps have been taken by govt to curb black money?
What other steps have been taken by govt to curb terror financing?
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