Demonetization policy upheld in 4-1 Supreme Court verdict

The court, which declined to be drawn into ruling on the economic merits of the policy, citing its lack of expertise, said enough time was given to people to exchange the currency and there was no room to allow people to exchange the demonetized notes now. “Individual interests must yield to the larger public interest,” it added.

The Bharatiya Janata Party (BJP) hailed the verdict as an endorsement of its policy, which came under severe criticism at the time. However, the Congress pointed out that the ruling was restricted to the executive’s powers and the procedure followed, not about the merits of demonetization. It also hailed the dissenting judgement that said Parliament should have ratified the move.

Six years after the decision by the Narendra Modi government shocked the country, justices S.A. Nazeer, B.R. Gavai, A.S. Bopanna and V. Ramasubramanian held that the Centre was empowered to demonetize all series of banknotes of ₹500 and ₹1,000 denominations by issuing an executive order on 8 November 2016.

Justice Gavai, writing the judgement on behalf of himself and the three other judges in the majority, affirmed the government’s argument that demonetization has reasonable nexus with curbing fake currency, black money, drug trafficking and terror financing and that the government is the “best judge” to decide appropriate methods of addressing the issue, in consultation with the Reserve Bank of India (RBI).

Penning the dissenting judgment, justice B.V. Nagarathna termed the demonetization decision “unlawful” on the ground that “the procedure followed for the same was not in accordance with law”, even as the judge lauded the move as “well-intentioned”.

The majority judgement held that “unless the said discretion has been exercised in a palpably arbitrary and unreasonable manner, it will not be possible for the court to interfere with the same…We have not found any flaw in the decision-making process as required under the RBI Act…the contention that the decision-making process suffers from non-consideration of relevant factors and eschewing of the irrelevant factors is without substance.”

According to justice Nagarathna, the Centre was obligated to bring in parliamentary legislation for demonetization, or alternatively, the proposal must have been initiated by the central board of RBI for taking some particular series of bank notes out of circulation.

In 2016, initial expectations that not all money in circulation would return to the banking system (because some of this could not be accounted for) were belied. However, the government has consistently maintained that the process of the money returning to the system provided it with enough intelligence to track defaulters, including shell firms. Over time, the Centre has also emphasized how demonetization gave digital transactions a boost.

Critics have said the exercise has not met any of its objectives and spoken of the distress it caused to individuals queueing up to deposit their money before the deadline, and businesses, especially small ones from the so-called informal sector. A clutch of over three dozen petitions accused the government of violating people’s fundamental rights and carrying out a move contrary to the law laid down under the RBI Act, 1934.

On Monday, the majority judgement said that the records adduced before the court showed there was adequate consultation between the Centre and RBI before the decision was taken and that, therefore, the move cannot be held to be bad in law just because the proposal emanated from the government and not from the central board of RBI.

“The record itself reveals that RBI and the Central government were in consultation with each other for a period of six months before the impugned notification was issued,” it said.

Ruling on the power of the Centre to demonetize the entire series of a currency, the majority view stressed the principle of purposive interpretation to explain the import of subsection (2) of Section 26 of the RBI Act. The provision authorizes the central government to notify that “any” series of bank notes of any denomination shall cease to be legal tender upon a recommendation by the central board of RBI.

Underlining that the scope of judicial review in matters of economic policy is narrow and is limited to scrutinizing the decision-making process, the majority judgment said the top court must steer clear of the question as to whether demonetization served its stated purposes or not because the courts lack the expertise to do so and this is best left to the wisdom of the experts.

“In such matters, legislative and quasi-legislative authorities are entitled to a free play, and unless the action suffers from patent illegality, manifest or palpable arbitrariness, the court should be slow in interfering with the same,” it held.

Some economists have flagged demonetization and Goods and Services Tax (GST) as the reasons behind the slowdown of the growth rate. Former RBI governor Raghuram Rajan, at a public event in November 2018, said: “The two successive shocks of demonetization and the GST had a serious impact on growth in India.”

The majority judgment further dismissed a plea that an unreasonably short period was provided to exchange the bank notes, noting that only eight days were given when demonetization took place in 1978, and a Constitution bench had upheld this decision in a 1996 judgment.

The majority judgment also refused to issue any order on a plea to frame a scheme for letting people with genuine reasons exchange the demonetized notes, holding neither the court nor the RBI can do so when the 2017 Act occupies the field.