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Supreme Court Verdict on Demonetisation

Context: A Constitution Bench of the Supreme Court has upheld the Union Government’s 2016 decision to demonetise currency notes of Rs 500 and Rs 1,000 by a 4:1 majority.

Supreme Court Verdict on Demonetisation Background


Why was Demonetisation Challenged?

Section 26(2) of Reserve Bank of India Act allows central govt. to declare any series of bank notes of any denomination illegal tender after a recommendation from central board of RBI.

  • Section 26(2) of RBI Act, 1934: The Union Government has claimed that it has the power to demonetise currency under Section 26 (2) of the RBI Act.
    • The petitioners argued that the provision allows only a specified series of currency to be demonetised, while the 2016 government notification demonetised all series of Rs 500 and Rs 1000 currency notes.
  • Due process not followed: Petitioners argued that as per the section, the recommendation should have emanated from the RBI, but in this case, the government had advised the central bank, following which it made the recommendation.
  • The Move’s Objectives Remain Unmet: The petitioners contended that the objectives of demonetisation as mentioned by the Government, were “false and could not have been and continues to not be achieved by demonetisation.”


Supreme Court’s Judgement on Demonetisation

Majority Judgment Minority Judgment
  • Constitutionally valid: The Supreme Court ruled that the decision to scrap the high-value currency notes does not suffer from any legal or constitutional flaw.
  • All series of notes: The court held that Section 26(2) cannot be interpreted only in relation to specific series of bank notes. It should be read to mean all series of bank notes.
  • Test of proportionality: The court held that the government’s decision satisfied the test of proportionality as there was a reasonable nexus between the objects and the means to achieve the objects.
  • No overnight phenomena: The decision came up after six month consultation between the Reserve Bank of India and the Union government.
  • Valid intention: The judgment said the decision-making process was not flawed merely because the procedure emanated from the government.
  • Executive wisdom: The Court also emphasized that it cannot supplant the wisdom of the executive through a judicial review of its decision.
  • Pronouncing a dissenting judgment, Justice B.V. Nagarathna held that demonetisation unlawful on legal grounds.
  • The powers of Union Government to demonetise should have been done through plenary legislation, Justice Nagarathna added.
  • “Parliament is often referred to a nation in miniature. It cannot be left alone on such a subject of importance,” she held.
  • The judge held that RBI should have initiated the demonetisation process as opposed to the Union Government, and since it was done the other way round, the process was legally flawed.

About Demonetisation

  • Demonetization refers to the decision of the government to revoke the legal tender status of a currency note. Once the currency note is demonetised, it cannot be used anymore.
  • Central banks all over the world follow a practice where older currency notes are revoked and new currency notes with better features are issued.


History of Demonetisation in India

  • India opted for demonetization two times before the 2016 demonetisation.
  • The first instance of demonetisation by the government was implemented in 1946 when the RBI demonetised Rs 1,000 and Rs 10,000 notes.
  • Later, higher denomination bank notes (Rs 1000, Rs 5000 and Rs 10000) were re-introduced in 1954. However, the Morarji Desai government demonetised these notes in 1978.
  • Reasons: Demonetisation has been implemented in India primarily because of economic and political issues like hyperinflation, hostilities, political turmoil, or other sensitive states of affairs like corruption, etc.


About the 2016 Demonetisation

  • On 8th November 2016, the Government of India announced the demonetisation of all INR 500 and INR 1,000 banknotes.
  • It also announced the issuance of new INR 500 and INR 2,000 banknotes in exchange for the demonetised banknotes.
  • Objectives behind 2016 demonetisation:
    • To discourage the use of high-denomination notes for illegal transactions and thus curb the widespread use of black money.
    • To encourage digitization of commercial transactions, formalise the economy and so, boost government tax revenues.


After Effects of 2016 Demonetisation in India

Positive Impacts Negative Impacts
  • Increase in tax collection: Due to the demonetisation drive, there is a considerable increase in the number of Income Tax Returns (ITRs) filed.
  • Black money recovery: According to the RBI, more than 99% of the invalidated money was returned to the banking system.
  • Digitization of economy: As per RBI report, demonetisation has made India a lesser cash-based economy.
  • Curbed terrorism: Funding of terrorist groups and unlawful activities stopped as an immediate effect of demonetisation. Further, demonetisation also curbed money laundering.
  • Economic impacts: Demands fell, businesses faced a crisis and GDP growth declined nearly 1.5%, with many small units and shops being shut down and it also created a liquidity shortage.
  • Cash-GDP ratio: The cash-GDP ratio has reached levels similar to the period before demonetisation.
  • Fake notes: The number of fake notes in the banking system jumped by 20.4 % during 2016-17 compared to the previous year.
  • Black money: Demonetisation was premised on the incorrect notion that `black means cash’. But cash is only one component of black wealth (about 1% of it).
  • Corruption: It is apparent that the corruption has not yet suppressed since demonetisation.


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