Supreme Court affirms 4-1 Centre’s 2016 demonetisation policy
Justice BV Nagarathna termed the demonetisation decision “unlawful”, holding it violated legal and procedural norms
A Supreme Court constitution bench by a 4-1 majority on Monday affirmed the Union government’s 2016 demonetisation policy that took currency notes of ₹500 and ₹1,000 denominations out of circulation.
Justice BR Gavai read out the majority verdict on behalf of himself, SA Nazeer, AS Bopanna, and V Ramasubramanian. Justice BV Nagarathna authored a dissenting judgment.
Delivering the majority verdict, justice Gavai said the 2016 demonetistion decision did not suffer from any legal or procedural flaws nor was it hit by the doctrine of proportionality. The judgment added the records adduced before the court showed there was adequate consultation between the Centre and the Reserve Bank of India (RBI) before the decision was taken. It said, therefore, the move cannot be held to be bad in law just because the proposal emanated from the government and not from the RBI as provided under the RBI Act.
Putting its stamp of approval on the Centre’s November 8, 2016 notification, the majority verdict underlined that judicial interference in matters related to economic policy is very limited and a “great deal of restraint” is required before interdicting any such policy decision.
The verdict held the 52-day window for the exchange of demonetised notes was “reasonable”. It cited previous verdict in the 1980s when the 1978 demonetisation decision with a widow of eight days for exchanging bank notes was affirmed.
Justice Gavai said whether a policy decision could achieve its objective or not cannot be the yardstick to judge its legal correctness and that what is important is the reasonableness of the objective sought to be achieved and legal compliance.
Justice Nagarathna termed the decision “unlawful”, holding it violated legal and procedural norms. She said demonetisation could be carried out only through legislation and not through an executive decision.
The judge added that the consultation process was also doubtful since it simply overlooked a contrary view of the central board of the banks regarding demonetisation.
Justice Nagarathna said the introduction of ₹2,000 notes after demonetising ₹500 and ₹1,000 notes showed that the 2016 move failed to achieve its stated objective. She added that because of the passage of time, the declaration of law in her judgment can only have a prospective effect and cannot undo anything done in 2016.
Over three dozen petitions were filed against the 2016 decision, accusing the government of violating the fundamental rights of people, and carrying out a move contrary to the law laid down under the RBI Act, 1934.
A constitution bench on October 12 asked the Centre and the RBI to submit their affidavits in the matter, explicating the decision-making process behind the policy.
The five-judge bench on that day turned down the government’s plea to shut the proceedings by declaring them infructuous and an academic exercise, saying it was a “serious matter”.
Submitting its affidavit in November, the government called demonetisation “a major step to fight the menace of fake currency notes, storage of unaccounted wealth and financing of subversive activities.”
Defending the decision, the government said demonetisation was a “critical step in the series of transformational economic policy” which did not only help in combating the menace of counterfeit currency, terror financing, black money,, and tax evasion, but also nudged large sections of the informal economy to become part of the formal economy.
The government claimed the demonetisation decision resulted in several “perceptible benefits” in the form of checking counterfeit currency and a significant increase in digital payment transactions and income tax compliance. It added its impact on India’s economic growth was “transient”.
“The overall impact of the withdrawal of the legal tender character of the SBNs (specified bank notes) on economic growth was transient, with the real growth rate being 8.2% in FY 16-17 and 6.8% in FY 17-18 --both being more than the decadal growth rate of 6.6% in the pre-pandemic years,” said the Centre’s affidavit.
Many economists have flagged demonetistion and Goods and Services Tax (GST) as the reasons behind a slowdown of the growth rate. Former RBI governor Raghuram Rajan, at a public event in November 2018, said: “The two successive shocks of demonetisation and the GST had a serious impact on growth in India.”
The RBI, in its affidavit, justified the move, contending the inconvenience caused to the public cannot be a ground to challenge the validity of demonetisation when the decision was taken in the “national economic interest”.
The Centre said the withdrawal of the legal tender character was one of the significant steps in the enhanced formalisation of the economy with the aim of expanding opportunities for the millions living on the periphery of the economy.
On the procedure adopted in declaring bank notes of ₹500 and ₹1,000 denominations invalid tender, the government said the central board of the RBI made a specific recommendation for demonetisation and also proposed a draft scheme for the implementation of the recommendation in accordance with the RBI Act.
“The withdrawal of legal tender character of a significant portion of total currency value was a well-considered decision. It was taken after extensive consultation with the RBI and advance preparations...All possible measures were taken to mitigate inconvenience to the public and reduce the disruption of economic activities,” it said.
Secrecy and confidentiality were critical requirements for this consultation and decision-making process, said the government, adding printing of banknotes of the new series was executed under this constraint.
The RBI, in its affidavit filed, also said the avowed objective of the impugned actions being in the national economic interest, the same ought to be given deference. “The inconvenience caused to the public cannot be a ground to challenge the validity of such actions, more particularly when prompt and adequate measures were taken by the answering respondent to mitigate the temporary hardships caused.”
Refuting the petitioners’ contention that demonetisation did not result in any tangible benefit, the RBI claimed that counterfeit notes detected in 2021-22 are at a comparatively lower level than that in the period prior to the withdrawal of the legal tender status of SBNs.
It added that there was no flaw in the decision-making process, and all regulations were duly followed. “The impugned actions were not arbitrary or capricious as alleged. They were bonafide actions taken in good faith with a legitimate objective,” said RBI’s affidavit.
A three-judge bench in December 2016 referred the matter to the larger bench after framing nine questions. The questions included whether the demonetisation violated fundamental rights relating to equality, life and liberty, property, and the freedom to carry out profession and trade.
It also sought to scrutinise the legality of the demonetisation notification on the anvils of the 1934 Act, besides examining whether the procedure adopted was fair.
The constitution bench reserved its verdict on the bunch of pleas on December 7 after hearing arguments from both sides.