Supreme Court finds no flaw in demonetisation process


The Hindu

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In 4:1 majority verdict, Supreme Court finds no flaw in demonetisation process

Four judges on a Constitution Bench of the Supreme Court on January 2 found no flaw in the process adopted by the government to demonetise ₹500 and ₹ 1000 currency notes through a gazette notification on November 8, 2016.

The sole woman judge on the Bench, Justice B.V. Nagarathna, however, disagreed with the majority, saying the demonetisation exercise, undertaken on the government’s initiative and based on a mere notification in the official gazette instead of a plenary legislation in the Parliament, was plainly unlawful and vitiated.

Justice Nagarathna said there was no “meaningful application of mind” by the Central Board of the Reserve Bank of India (RBI) to the government’s initiative for withdrawing ₹500 and ₹ 1000 notes, which formed 86% of the currency in circulation at the time causing severe financial crunch and socio-economic despair.
Media personnel outside the Supreme Court on the day of pronouncement of its judgement on a batch of pleas challenging the Central Government’s 2016 decision to demonetise, in New Delhi on January 2, 2023.

Justice B.R. Gavai, delivering the majority judgment of the Bench, supported by Justices S. Abdul Nazeer, A.S. Bopanna, V. Ramasubramanian, said the court can exercise only a limited judicial review in matters of economic policy. It cannot supplant the views of the experts. The records do not show any flaw in the use of decision-making powers of the government. There was a prior consultation between the government and the RBI dating back six months prior to November 8, 2016.

Justice Gavai concluded that the purpose of the demonetisation was proper. There was a reasonable nexus between the objectives of clamping down on black money, terror funding, counterfeiting and the act of demonetisation. The action of demonetisation and time period given for currency exchange were not hit by the doctrine of proportionality.

In 1978, only three days and a further extension of five days were given to exchange old notes for new. On the other hand, in 2016, 52 days were given to the public.

The majority judgment said the RBI did not have any independent powers to extend the time period. The government, under Section 26(2) of the RBI Act, had the power to demonetise all series of bank notes and it was not limited to one series alone. There was no excessive delegation of power by which the government kick-started the demonetisation exercise through a notification in November 2016.

Dissenting, Justice Nagarathna said the court’s judicial review was indeed limited as far as checking the merits of an economic policy, but the court could examine the correctness of the process of demonetisation policy to see whether or not it violated the constitutional rights of citizens.

The policy of demonetisation should originate from the Central Board of the RBI and not the government, Justice Nagarathna said. Central government can initiate demonetisation through a plenary legislation of the Parliament, which is the “nation in miniature”.

“Without the Parliament, democracy will not thrive,” Justice Nagarathna said.

Demonetisation initiated by the government had great ramifications. It should have been extensively debated in the Parliament. If the Parliament was not in session at the time, the government should have promulgated a prior ordinance.

The views of the Parliament were critical, especially when demonetisation hit the public at large. The action of demonetisation in 2016 on the basis of a mere notification was contrary to the law and the subsequent Act was also, thereby, unlawful.

Justice Nagarathna’s view contrasted with that of others on the Bench when she concluded that there was no independent application of mind by the central bank.

The entire exercise was carried out in 24 hours between November 7 and November 8, 2016, Justice Nagarathna pointed out.

Only an opinion of the Central Board was sought after the government took the decision to demonetise 86% of the currency leading to severe financial crunch. The RBI Act did not allow the demonetisation of all series of bank notes in circulation.

Justice Nagarathna said she was not questioning the object of demonetisation. It may have been “noble and well-intentioned”, but the process undertaken was bad in law.

Nothing however can be done to restore the situation to status quo ante, but the judgment could act prospectively, Justice Nagarathna said in her separate opinion.

The Constitution Bench’s judgment came after hearing over 50 petitions challenging the demonetisation exercise of the government undertaken in November 2016.

The court had reserved the case for judgment on December 7.

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