Date: 04/01/2023

Relevance: GS-3: Basics of economics; Indian Economy and issues relating to planning, mobilization, of resources, growth

Key Phrases: Doctrine of Proportionality, Lack of Independent Powers With RBI, Plenary Legislation, RBI Act, 1934, Transformational Economic Policy Step

Why in News?

• A Constitution Bench of the Supreme Court recently upheld the decision taken by the central government six years ago in 2016 to demonetise currency notes of Rs 500 and Rs 1,000 denominations by a 4:1 majority.
• The sole woman judge, Justice B.V. Nagarathna, on the Bench disagreed with the majority, with the view that 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.

Majority Opinions in Favor of Demonetisation Exercise:

• Limited judicial review powers in matters of economic policy: The majority of judges had the opinion that the court can exercise only a limited judicial review in matters of economic policy and it cannot supplant the views of the experts.
• No breach of decision-making power by central government: 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.
• Objectives to curb counterfeiting/fake currency: There was a reasonable nexus between the objectives of clamping down on black money, terror funding, counterfeiting and the act of demonetisation.
• Doctrine of proportionality: 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 while 52 days were given to the public in 2016.
• Lack of independent powers with RBI: The majority judgment said the RBI did not have any independent powers to extend the time period.
• Power to demonetise under RBI act: The government, under Section 26(2) of the RBI Act, had the power to demonetise all series of banknotes and it was not limited to one series alone and thus, there was no excessive delegation of power for conducting the demonetisation exercise.

Dissenting Views Against The Demonetisation:

• Interpretation of ‘Any’ series of notes under Section 26(2) of the RBI Act: The Central Government possesses the power to initiate and carry out the process of demonetisation of all series of bank notes, of all denominations. However, all series of bank notes, of all denominations, could not be recommended to be demonetised by the Central Board of the Bank under Section 26 (2) of the Act.
• Demonetisation should originate from RBI: As per Justice Nagarathna, there was no "meaningful application of mind" by the Central Board of the RBI to the government's initiative for withdrawing ₹ 500 and ₹ 1000 notes, which formed 86% of the currency in circulation at the time causing severe financial crunch and socio-economic despair. Hence, demonetisation policy should originate from the Central Board of the RBI, not the government.
• Violation of citizen’s rights: 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 it violated the constitutional rights of citizens.
• Demonetisaton needed a Plenary legislation: Central government should have initiated demonetisation through a plenary legislation of the Parliament, which is the "nation in miniature" as a democracy will not thrive without the Parliament. Demonetization 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.
• Unlawful Act: 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.
• Excessive Delegation: If the Central Board of the Bank is vested with the power to recommend demonetisation of “all” series or “all” denominations of bank notes, the same would amount to a case of excessive vesting of powers with the Bank.
• Flaw in process rather than motive of demonetisation: Only an opinion of the Central Board was sought after the government took the decision to demonetise 86% of the currency leading to severe financial crunch. The object of demonetisation may have been "noble and well-intentioned", but the process undertaken was bad in law.

Arguments Of The Government In Favor Of Demonetisation Exercise:

• Transformational economic policy step: As per the government, demonetisation exercise led to a phenomenal growth in digital transactions along with restricting the evils of black money, terror funding and counterfeiting.
• Expansion of formal economy: It had claimed that demonetisation was a policy driven exercise which pushes to “expand formal economy” and thin the ranks of the informal cash-based sector.

Future Lessons from Demonetisation:

• Before taking any major decision, one should not miss the advice of Experts.
• Proper assessment of pros and cons needs to be done before taking any massive decision.
• Human Behaviour should be considered. In the case of India, where people revolve around laws and regulations, a decision has to be taken that should impact everyone. 99% currency returned back. This shows people found loopholes in the law and invested simultaneously.
• The government agencies should do proper homework before taking steps.

Source: The Hindu

Mains Question:

Q. Critically examine the impact of demonetisation on the Indian economy (150 words).