The Supreme Court on Monday said the government’s controversial 2016 decision to scrap all high-value currency notes which were then in circulation doesn’t suffer from any legal or constitutional flaw. In a 4:1 majority verdict, the top court said the decision-making process cannot be faulted either, merely because the procedure emanated from the government rather than the Reserve Bank of India (RBI) or that previous such instances followed legislative sanction.
In what could come as a relief to the government, the SC also chose to avoid commenting on the “wisdom” of the move and said it wasn’t relevant whether the objectives set out by the government for the move were achieved or not.
“The (demonetisation) notification (issued on November 8, 2016) satisfies the test of proportionality and as such cannot be struck down,” the five-judge Constitution bench headed by Justice SA Nazeer said in a 258-page verdict.
On the face of it, the key goal of curbing cash in circulation (CIC) and thereby mounting a frontal assault on black money doesn’t appear to have been achieved. As much as 99.3% of the invalidated notes were returned by the public, contrary to the notion that a substantial chunk would have been extinguished by the supposed tax evaders. According to RBI data, CIC stood at Rs 32.42 trillion or 12.6% of the GDP as of December 23, 2022, against Rs 18 trillion or 11.7% of GDP on November 8, 2016, the day demonetisation was announced.
Though the tax collections and buoyancy have seen growth marginally higher than the trend for certain periods after demonetisation and particularly in FY22 following the pandemic, no cogent evidence has been provided by the government to link this to the controversial decision. Also, the economic cost of the move in terms of loss of growth pace has been estimated as substantive, besides unquantifiable human suffering.
However, there’s been a big jump in digital payments – UPI transactions grew from just Rs 100 crore in the month of demonetisation to a whopping Rs 12.82 trillion in December 2022.
Justice BV Nagarathna wrote a dissenting judgment, where she called the decision to withdraw 500 and 1,000 rupee notes “unlawful” and “vitiated, albeit being “well-intentioned”. The proposal should have been discussed in Parliament and conducted through legislation, she said. “…under sub-section (2) of Section 26 of the RBI Act, the initiation of the process of demonetisation and the exercise of power originates from the Central Board of the Bank which has to recommend to the Central Government and the latter may accept the recommendation and in such event it would issue a gazette notification,” the dissenting judge noted, citing that in the instant case, it was the Centre which “initiated” the process.
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According to the majority view, however, the decision had a reasonable nexus with its objectives, such as eradicating black money, terror funding etc. The court also said the 52-day window provided for the exchange of the demonetised notes with legal tenders was “not unreasonable” and it cannot be extended now.
“The power available to the Centre under section 26(2) of the RBI Act cannot be restricted to mean that it can be exercised only for some series of notes and not for all series of notes. Merely because on two earlier occasions, the demonetisation exercise was by plenary legislation, it cannot be held that such power would not be available to the Central government,” Justice BR Gavai, who read the majority judgment, said.
The bench said section 26(2) does not provide for excessive legislation in as much as there is an in-built safeguard that such a power has to be exercised on the recommendation of the RBI’s central board and that it is not liable to be struck down.
The top court’s judgment came on a batch of 58 petitions challenging the demonetisation move. Calling the demonetisation “deeply flawed”, the petitioners had argued that the Centre cannot on its own initiate any proposal relating to legal tender, which can only be done on the recommendation of the RBI’s central board.
Justice Nagarathna opined that demonetisation of all series of notes at the Centre’s instance is a far more serious issue that has wider implications on the economy and the citizens of the country. Observing that there was no independent application of mind by RBI, she said the entire exercise was carried out in 24 hours.
“In my view, the power of the Central government being vast has to be exercised through a plenary legislation rather than by an executive act by issuance of notification. It is necessary that Parliament, which consists of the representatives of the people of the country, discusses the matter and thereafter, approves the matter,” Justice Nagarathna said.
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Defending the demonetisation exercise, the government had said the court cannot decide a matter when no tangible relief can be granted by way of “putting the clock back” and “unscrambling a scrambled egg”.
RBI had earlier admitted in its submission that there were “temporary hardships” and that those, too, are an integral part of the nation-building process, but there was a mechanism by which the problems that arose were solved.
Political parties reacted to the SC decision variously. The BJP on Monday hailed the judgment as “historic” and slammed the Congress for its campaign against the decision and asked if its leader Rahul Gandhi will tender an apology after the verdict. Former law minister and BJP leader Ravi Shankar Prasad asserted that the demonetisation done in 2016 proved to be the “biggest blow” to terrorism by curbing terror funding. It boosted income tax and cleansed the economy, he claimed.
It is “misleading and wrong” to say the Supreme Court has upheld demonetisation, the Congress said on Monday, adding that the majority apex court verdict on the matter deals with the limited issue of the process of decision-making and not with its outcomes. The verdict has nothing to say on whether the stated objectives of demonetisation were met, AICC general secretary Jairam Ramesh said.
Former finance minister P Chidambaram, who was also a counsel for the petitioners, tweeted on Monday that the court’s majority decision “steered clear of the question whether the objectives were achieved”.