Sansad TV Perspective: Demonetisation Verdict

In the series Sansad TV Perspective, we bring you an analysis of the discussion featured on the insightful programme ‘Perspective’ on Sansad TV, on various important topics affecting India and also the world. This analysis will help you immensely for the IAS exam, especially the mains exam, where a well-rounded understanding of topics is a prerequisite for writing answers that fetch good marks.

In this article, we feature the discussion on the topic: Demonetisation Verdict

Anchor – Teena Jha

Guests:

1. Anand Singh Bhal, Former Principal Economic Advisor, Govt. of India
2. A.K. Bhattacharya, Editorial Director, Business Standard
3. Desh Ratan Nigam, Advocate, Supreme Court of India

Context: Supreme Court verdict on demonetisation.

Highlights of the discussion:

• Introduction
• Supreme Court verdict and its significance
• Analysis of the verdict
• Advantages and disadvantages of demonetisation

Introduction:

• More than six years after the Centre’s decision to demonetise the Rs 1,000 and Rs 500 denomination notes, the Supreme Court in a 4:1 majority verdict has upheld the move, saying the decision-making process was not flawed merely because the procedure emanated from the government. 
• Ruling that the decision to scrap the high-value currency notes does not suffer from any legal or constitutional flaw, the top court said there was consultation between the Reserve Bank of India and the Union government for a period of six months. 
• The top court also observed that the decision being the executive’s economic policy cannot be reversed. 
• Justice B V Nagarathna dissented from the majority judgment, saying demonetisation should’ve been done through legislation and not through a notification. 

For more information on the verdict, read here: CNA dated 3rd Jan 2023

Significance of the verdict:

• The verdict was very significant for India, specifically in the context of the separation of power between the three institutions – Legislature, Executive and Judiciary.
• The demonetisation process addressed many concerns like terror funding, fake currency, black money, tax evasion, etc. which are the sole domain of the executive or the government.
• The decision of the SC was largely on the technicality of the process. It should be remembered that monetary policy is the stated objective of the RBI.
• The RBI Act itself delegates the demonetisation powers to the government. RBI acts as a recommendatory body, whose advice is not binding on the government.
• Moreover, SC does not have the power to recommend to the government which routes to adopt for passing an economic policy.

For more information on demonetisation, read here: Demonetisation Essay

Supreme Court Verdict:

• SC has clarified that it was an economic policy decision and that judicial review was only possible for the process of notification and not the objective and outcome.
• It should be noted that demonetisation can occur in two ways, either through legislation or through executive notification.
• It was pronounced that the statutory procedure under Section 26(2) of the Reserve Bank of India Act (RBI Act) was not violated merely because the Centre had taken the initiative to “advise” the Central Board to consider recommending demonetisation.
• The dissenting judgment favoured the demonetisation decision through legislation.
• It should also be noted that the dissenting judge has clearly stated that the demonetisation was a well-thought, well-intentioned, and well-considered decision. She has only questioned the legality of the procedure.
• SC further found it to be completely proportional considering the objectives it was supposed to achieve.
  • The doctrine of proportionality simply means that administrative action should not be more drastic than it ought to be for obtaining the desired result. This implies that canon should not be used to shoot a sparrow.
• The SC also observed that the period of exchange (52 days) was also reasonable.
• It was also found out during the hearing that Finance Ministry sent a note to the RBI on 7th November 2016 and the Central Board on 8th November 2016 decided to declare that Rs 500 and Rs 1000 notes will not remain legal tenders.
• The earlier two decisions on demonetisation in India were taken through legislation.

Analysis of the verdict:

• The larger point of the debate about the outcomes and objectives of the demonetisation process was not discussed. Thus, it is argued by many that it has not addressed the impacts of the move on the lowest rung of people that lost their source of income.
  • It should be noted that demonetisation led to the closing of many Micro, Small and Medium enterprises that dealt with cash in a huge way.
• The executive route adopted by the government was correct as secrecy was required initially otherwise, it would have defeated the entire purpose of the exercise. It also provided the added advantage of discussion with the expert body (RBI). 
• On the other hand, it is also argued by many experts that any economic decision comes with a trade-off. The Government of the day in its wisdom took the decision considering the serious issue of black money and fake currency.
• It is also suggested by many economists that the outcomes of these decisions cannot be established in advance.
• Several experts are also of the opinion that the highlighted challenges were more about speculations and were largely politically motivated. For instance, it was challenged that there was no consultation with the RBI.
• According to the dissenting judge, the government should have followed the ordinance route like the demonetisation of 1978 or the Bank Nationalization move. This would have given the opportunity to the legislature to debate the issue. It would have also ensured the secrecy required for such a step.

Disadvantages of Demonetisation:

• One of the major aims of the move was to reduce the circulation of cash. However, the data points out that currency circulation increased from 12% of GDP in 2010 to 14% post-demonetisation exercise.
• The Tax to GDP ratio has also remained almost unchanged.
• The Micro, Small, and Medium Enterprises and the unorganized sector suffered the most from the demonetisation process.

Advantages of Demonetisation:

• The size of the economy has grown since 2010, thus there is an increase in cash circulation.
• Digital payments saw a huge increase. If digital payments are not there, cash circulation would further expand.
• Though terrorism in the country has decreased due to many factors, one major reason is the decline in the source of funding.
• Tax evasion was also controlled to a certain extent.
• The issue of fake currency has been almost eliminated.

Read all the previous Sansad TV Perspective articles in the link.

Sansad TV Perspective: Demonetisation Verdict:- Download PDF Here