- Prelims: Demonetisation, Reserve Bank of India Act, 1934, Seventh Schedule etc
- Mains GS Paper I & II: Indian Economy, monetary policy, issues related to planning, growth and development etc
ARTICLE HIGHLIGHTS
- The Supreme Court in a 4:1 majority verdict on Monday upheld the government’s 2016 decision to demonetise the ₹1,000 and ₹500 denomination notes, saying the decision-making process was not flawed.
INSIGHTS ON THE ISSUE
Context
Demonetisation:
- It is the act of stripping a currency unit of its status as legal tender.
- Change in currency/money pulled from circulation: It occurs whenever there is a change of national currency and the current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins.
Advantages and disadvantages:
Objectives:
- Address disparate evils plaguing the nation’s economy, including:
- Practices of hoarding “black” money
- Counterfeiting
- Terror funding
- Drug trafficking
- Emergence of a parallel economy
- Money laundering including hawala transactions.
How is money demonetised?
- Sub-section (1) of Section 26 of the Reserve Bank of India Act, 1934: Every bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein and shall be guaranteed by the central government.
- Sub-section (1) of Section 26 of the Reserve Bank of India Act, 1934: This provision is subject to sub-section (2) of Section 26 of the Act.
- Sub-section (2) of Section 26 of the Act: It applies only when a proposal for demonetisation is initiated by the central board of the bank by way of a recommendation being made to the central government.
- The recommendation can be in respect of any series of bank notes of any denomination which is interpreted to mean any specified series of bank notes of any specified denomination.
- Any denomination: means any particular or specified denomination of bank notes.
- On receipt of the said recommendation: The central government may accept the said recommendation or may not do so.
- If the central government accepts the recommendation
- It may issue a notification in the Gazette of India specifying the date with effect from which bank notes of any specified denomination shall cease to be legal tender and shall cease to have the guarantee of the central government.
- The Act does not bar the central government from proposing or initiating demonetisation: It could do so under Entry 36 of List I of the Seventh Schedule.
- It has to be done only by an ordinance, followed by an Act of Parliament or by plenary legislation through the Parliament.
Issue of tussle between central bank and government on demonetisation:
- Sub-sec(2) of section 26: The central government cannot demonetise bank notes by issuance of a gazette notification as if it is exercising power under sub-section (2) of Section 26 of the Act.
- Opinion of the central bank: Government must seek the opinion of the central board of the bank
- A bank is the sole authority to regulate circulation of bank notes and secure monetary stability.
- Non binding: On receipt of a negative opinion from the central board of the bank.
- Central government may still intend to go ahead with the said process after weighing the pros and cons.
- By means of an ordinance and/or parliamentary legislation.
- If the central board of the bank concurs with the proposal of the central government: Central government have to undertake a legislative process and not carry out the measure by simply issuing a gazette notification.
Divergent comments in 4:1 judgment:
- Issuance of a notification as contemplated under subsection (2) of Section 26 of the Act: such provision would not apply in cases where the proposal for demonetisation has originated from the central government.
- The bank acted at the behest of the central government: It did not render an independent opinion to the central government.
- Notification dated November 8, 2016: issued under subsection (2) of Section 26 of the Act is unlawful.
- Subsequent Ordinance of 2016 and Act of 2017 incorporating are also unlawful.
Way Forward
- The measure was reflective of concern for the economic health and security of the country and demonstrates foresight.
- The measure has been regarded as unlawful only on a purely legalistic analysis of the relevant provisions of the Act and not on the objects of demonetisation.
- Demonetisation was an expeditious move to boldly counter the black money and parallel economy, with visible impact on how the government’s policies are perceived in international circles of economic power.
QUESTION FOR PRACTICE
Q. Is inclusive growth possible under market economy ? State the significance of financial inclusion in achieving economic growth in India.(UPSC 2022) (200 WORDS, 10 MARKS)
