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Four judges on a Constitution Bench of the Supreme Court on Monday found no flaw in the government’s decision to demonetise ₹500 and ₹1,000 currency notes through a gazette notification on November 8, 2016.
The sole woman judge on the Bench, Justice BV 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 ₹1,000 notes, which formed 86 per cent of the currency in circulation at the time, causing a severe financial crunch and socio-economic despair.
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 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.
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The majority judgment said the RBI did not have any independent powers to extend the time period. The government 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 kickstarted 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 per cent of the currency, leading to a 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.
While reserving the case for verdict on that day, the Bench had directed the Union Government and the Reserve Bank of India (RBI) to place on record the “relevant records” of the demonetisation policy.
The court had said it would not fold its hands and sit without judicially reviewing the procedure or manner in which ₹500 and ₹1000 currency notes were withdrawn from legal tender in November 2016.
“Just because it is an economic policy, the court cannot fold its hands and sit… The court will go into the manner in which the decision was taken,” Justice Nagarathna had addressed the government and the RBI on December 7.
Senior advocate P. Chidambaram, for the petitioners, had submitted that the RBI had “meekly submitted to the government’s recommendation to withdraw 86 per cent of the currency in the market after a deliberation of just one hour in one day”.
He had said finding the objectives of the 2016 demonetisation exercise was like looking for a “black cat in a dark room”. He had submitted that the government cannot “frighten” the court to not judicially review the policy by saying that judges were not experts in economic policy. They had said that the evils of black money, fake currency and terror continue to hold fort.
The government had argued that demonetisation was a “transformational economic policy step” which led to a phenomenal growth in digital transactions, while choking the evils of black money, terror funding and counterfeiting. It had claimed that demonetisation was a “critical” part of a policy push to “expand formal economy” and thin the ranks of the informal cash-based sector.
The central bank, represented by senior advocate Jaideep Gupta, had said demonetisation was done on the recommendation of the RBI. It was not “uncanalised or unguided”. Elaborate arrangements were in place. Reasonable opportunity was given to people to exchange their old notes for new. The exercise was an “integral part of nation-building”.
Demonetisation case
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Krishnadas Rajagopal
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