Demonetisation Judgment: Highlighting the Voice of Dissent

The article 'Demonetisation Judgment: Highlighting the Voice of Dissent' analyses the recent decision taken by the Hon’ble Supreme Court of India in upholding demonetisation along with one of the most remarkable dissenting opinions in constitutional history. The Government of India took a policy decision that the banknotes in the denomination of Rs. 500 and Rs. 1000 shall cease to be legal tender from 8th November 2016 onwards, and simultaneously, banknotes of Rs. 2000 were introduced. 

Background

The Honourable Prime Minister Shri Narender Modi declared war on corruption and black money. He publicly announced that as of midnight on November 8, 2016, the 500 and 1000 Rupee notes would no longer be accepted as legal tender. New Rs. 500 and Rs. 2,000 notes would be released by the RBI and put into circulation on November 10, 2016. The legal tender notes of 100, 50, 20, 10, 5, 2, and 1 Rupee would continue to exist. The PM took this action in an effort to show his commitment to fighting against corruption, black market transactions, terrorism, and counterfeit currency. This action was anticipated to purge the official economic system and eliminate black money simultaneously.

The Government's decision to demonetize Rs. 500 and Rs. 1000 notes were partly motivated by the fact that their circulation did not correspond to economic expansion. The Finance Ministry reports that between 2011 and 2016, the total number of notes in circulation increased by 40%, but the circulation of the Rs. 500 and Rs. 1000 notes increased by 76% and 109%, respectively. In comparison, the economy has risen by only 30%, much less than the rate of money circulation.

The RBI had previously acknowledged in its arguments that there were "temporary hardships" and that such were also a necessary component of the process of developing a nation, but that there was a mechanism through which the issues that emerged were resolved. The Centre recently informed the top court in an affidavit that the decision to implement demonetisation was "well-considered" and was a part of a bigger plan to address the threat of fake money, terror financing, black money, and tax evasion.

The 5-judge comprising Justices S Abdul Nazeer, BR Gavai, AS Bopanna, V Ramasubramanian and BV Nagarathna was answering a division bench reference. A five-judge Constitution panel dismissed a group of petitions contesting the decision with a 4:1 majority, stating that the decision cannot be overturned because it is the Executive's economic policy.

Arguments for and against demonetisation presented in the SC

a) For (by RBI and government):

The initiation procedure is not covered in the aforementioned Section. For the Central Board meeting, the quorum required by the RBI General Regulations, 1949, was attained. Although the RBI was consulted beginning in February 2016, the process was kept private. The RBI did not approve the previous demonetisation measures, but they were passed into law by the previous governments.

b) Against (by petitioners):

The RBI should have been suggested in accordance with Section 26(2). In this instance, the central bank proposed after receiving advice from the government. Earlier governments had demonetised currency through a statute passed by Parliament (in 1946 and 1978).

The Supreme Court’s (4:1) Verdict On Demonetisation

The questions sent before the Constitution Bench were reframed into six issues by Justice B R Gavai, writing for himself and Justices S Abdul Nazeer, A S Bopanna, and V Ramasubramanian in the Supreme Court's majority judgement upholding the government's demonetisation decree of November 8, 2016. Justice B V Nagarathna dissented from the majority opinion's logic and findings in her opinion.

1. Considering that the word "any" appears before the word "series" in the aforementioned sub-section, can the power granted to the Central Government under sub-section (2) of Section 26 of the RBI Act be limited so that it can only be used for "one" or "some" series of banknotes and not "all" series, in particular, given that on the previous two occasions, the demonetisation exercise was carried out through plenary legislation?

Majority view: According to Section 26(2) of the RBI Act, "on the recommendation of the Central Board (of the RBI), the Central Government may, by notification in the Gazette of India, declare that any series of bank notes of any denomination shall cease to be legal tender with effect from such date as may be specified in the notification." The petitioners claimed that the word "any" would need to be given a specific definition to only indicate "some" legal currency of a specific denomination, not "all." Senior Attorney P. Chidambaram claimed that the RBI only has the authority to suggest "a particular series" of notes and that in order to demonetize "all series" of a given denomination, additional legislation from Parliament was required.

The majority opinion, in contrast, argued that the phrase must be given a purposeful connotation since any other interpretation would be ludicrous. The court used the following scenario to illustrate its point: "If there are 20 series of a particular denomination and the petitioners' argument is accepted, the Central Government would be given the authority to demonetize 19 series of the said denomination while leaving one series of the said denomination to remain legal tender, which would result in a chaotic situation.”

Dissenting view: According to Justice Nagarathna, the RBI would be given disproportionate and arbitrary powers if the word "any" could mean "all." According to her, "the Union of India's contention that the Central Government has the authority to demonetise "all" series of banknotes of "all" denominations, which would mean that every Rs. 1, Rs. 5, Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 500, Rs. 1,000, Rs. 5,000, and Rs. 10,000 could be demonetised.
Since the same is theoretically possible, in my opinion, such a broad power cannot be exercised by the Central Government in the exercise of executive power as if it were one under sub-section (2) of Section 26 of the Act by issuing a simple gazette notification. The Central Government's plan can only be implemented through plenary legislation, which is passed after a substantive debate in Parliament.”

2. If it is determined that the authority granted by Section 26 of the RBI Act's sub-section (2) can be used with regard to "all" series of bank notes, is the Central Government's exercise of such authority considered to be excessive delegation and, as a result, subject to judicial review?

Majority view: The majority opinion rejected the petitioners' argument that the RBI Act gives the Centre an undue amount of legislative authority and is, therefore, unconstitutional. Insofar as the Central Government's decision under subsection (2) of Section 26 of the RBI Act is concerned, that decision must be based on the Central Board's proposal. In light of the fact that the Central Government is compelled to act on the RBI's proposal, we thus believe that sub-section (2) of Section 26 of the RBI Act has an inherent safety net. Additionally, it said that the central government, which is accountable to Parliament, receives all power delegations.

Dissenting view: The Centre's 2016 decision was unconstitutional because Justice Nagarathna determined that Section 26(2) provides the Center disproportionate authority to demonetize currency by simply issuing a gazette announcement.

3. Is the impugned Notification from November 8, 2016, susceptible to being quashed because the legality of the decision-making process is in question?

Majority view: The government's claim that the procedure could not be invalidated simply because the Center started it was the basis for the majority opinion. The decision points out that the RBI and the Centre had discussed the proposal for more than six months before it was informed, according to the minutes of the RBI Central Board meeting that proposed demonetisation on November 8, 2016. The majority held that the court cannot judge the efficacy of economic policy on the merits and soundness of the decision. It did, however, concur with the Centre's assertion that the choice had to be taken quickly and secretively in order to be effective.

Dissenting view: The recommendation for demonetization came from the Center rather than the RBI's Central Board, which Justice Nagarathna ruled violated Section 26(2) of the RBI Act. The dissenting opinion claims that the use of wording like "as desired" by the Central Government, "government has "advised" the withdrawal of the legal tender of existing Rs. 500 and Rs. 1,000 notes, the recommendation has been "obtained," etc., are self-explanatory.

According to the opposing viewpoint, if the Centre had actually proposed the idea, then it should have introduced legislation in Parliament. The dissent queries why an Ordinance that could have been afterwards ratified by Parliament could not have been filed if urgency and quickness were required. For instance, an Ordinance was utilised to eliminate Jammu & Kashmir's special status in August 2019.

4. Whether the impugned notification dated 8th November 2016 is liable to be struck down applying the test of proportionality?

Majority view: The majority ruling evaluates the decision's constitutionality using a four-pronged proportionality test. Legitimate purpose, reasonable link with the purpose, need, and if the action chosen is proportionate or balanced are the four criteria that must be met. According to the majority opinion, reducing the use of counterfeit money, black money, and funding for terrorism is in the state's best interests and is related to demonetisation in a logical way.

The third part requires the court to decide whether the choice was required and that there were no other options that might have served the same objective with less harm to the public. In this case, the court stated that the RBI, which is "exclusively within the province of the experts," should provide an answer. Regarding the fourth factor, the court stated that it was "extremely difficult to determine what alternative step may have been performed with a lesser degree of limitation."

Dissenting view: This question doesn't need to be addressed, according to Justice Nagarathna, who previously ruled that the demonetization decision was unconstitutional.

5. Whether the period provided for the exchange of notes vide the impugned notification dated 8th November 2016 can be said to be unreasonable?

Majority view: The court highlighted a previous demonetization that took place in 1978 and allowed for the exchange of demonetised notes within a three-day window. A court's Constitution Bench affirmed this. According to the majority position, which relied on this ruling, "we fail to understand as to how the claimed time of 52 days may be viewed as being unfair, unjust, and in violation of the petitioners' fundamental rights."

Dissenting view: Since the dissent had already held the demonetisation decision unlawful, Justice Nagarathna did not answer this question.

6. Whether the RBI has the independent authority under subsection (2) of Section 4 of the 2017 Act, independent of Section 3 and Section 4(1) thereof, to accept the demonetised notes after the period stated in notifications made according to subsection (1) of Section 4 of the 2017 Act?

Majority view: Holding, transmitting, or receiving demonetised cash is forbidden and punishable under the Specified Bank Notes (Cessation of Liabilities) Act, 2017. However, some earlier notices gave some people, like those who were abroad when demonetisation was announced, a grace time to swap their old cash. The petitioners stated that since Parliament had already approved the 2017 Act, RBI lacked the authority to permit that. According to the majority opinion, the 2017 law must be interpreted in light of the earlier notifications for it to have a "contextual and harmonious construction."

Dissenting view: Since the dissent had already held the demonetisation decision unlawful, Justice Nagarathna did not answer this question.

Conclusion

The Supreme Court accepted the argument that there had been sufficient consultation between the Union government and the RBI and upheld the government's authority to demonetize notes. The majority concluded that because demonetization has a plausible connection to the objectives, the Center's 2016 announcement is legal and passes the proportionality test. The decision-making process, it was stated, could not be criticised just because the suggestion came from the Central government. The Court further said that the entire series of money can be demonetized under Section 26(2) of the RBI Act, which gives the Center the authority to do so.

The swift implementation of demonetization was a bold response to the threat posed by black money and the parallel economy (illegal activity, such as money laundering, smuggling, etc.), which had a noticeable effect on how the government's policies were viewed in circles of global economic influence. However, it was noted that the Court did not adequately address the issue of whether the negative effects could have been limited, nor did it criticise the government for failing to foresee the move's impact on the economy and the severe suffering it caused the citizenry.

The Supreme Court said throughout the hearing that demonetization might not be reversed because "the clock cannot be turned back." The economy and society have now fully recovered from the shock of the decision to demonetize currency after six years. However, the Supreme Court's ruling on demonetisation and the related arguments may influence it to set standards for such actions in the future.

References

[1] Inderjeet Santoshi, Constitutional Validity of Demonetization in India, Available Here

[2] Vivek Narayan Sharma v. Union of India; Writ Petition (Civil) No. 906 of 2016 

[3] Supreme Court Upholds Demonetisation: What was the challenge about? Available Here

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