GS Paper 2
Syllabus: Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation
Source: IE
Direction: The article highlights the background in which the issue of demonetisation reached the SC, arguments in favour and against demonetisation and the recent SC verdict.
Context: The Supreme Court upheld the government’s decision to demonetise currency notes of Rs 500 and Rs 1,000 by a 4:1 majority.
Background:
- On November 8, 2016, the PM of India announced that the two notes would no more be legal tender, with immediate effect.
- Introduced new notes of Rs 2,000 and Rs 500 for public circulation.
- Two primary reasons: to curb fake currency notes and reduce black money stored as cash.
- Though supported by many, 58 petitions have been filed in the SC challenging various aspects.
- The petitioners accused that Section 26(2) of RBI Act, 1934, was not followed: On the recommendation of the [RBI] Central Board, the Central Government may, by notification in the Gazette of India, declare that any series of bank notes of any denomination shall cease to be legal tender.
- The court was to consider whether the recommendation for the policy came from the government or the RBI.
Arguments for and against demonetisation presented in the SC:
| Against (by petitioners) | For (by RBI and government) |
| ● As per Section 26(2), the recommendation should have emanated from the RBI.
● In this case, the government had advised the central bank, following which it made the recommendation. ● Earlier governments had demonetised currency (in 1946 and 1978), by way of a law made by Parliament. |
● The said Section does not talk about the process of initiation.
● The quorum as determined by RBI General Regulations, 1949, was met for the Central Board meeting. ● Though consultations with the RBI began in Feb 2016, the process was kept confidential. ● The RBI had not agreed to the previous demonetisation decisions, but the earlier governments made the law. |
The SC’s (4:1) verdict on demonetisation:
- The Centre’s notification was valid and satisfied the test of proportionality – a reasonable nexus between the objectives and the means to achieve the objectives.
- From the record, it appears that there was a consultative process between the central government and RBI for over 6 months before the decision was taken.
- The Decision-making process cannot be faulted merely because the proposal emanated from the centre (as the government and RBI are not in ‘isolated boxes’) and the court cannot replace the wisdom of the executive with its wisdom.
- The action taken by the Central Government has been validated by the Specified Bank Notes (Cessation of liabilities) Act, 2017, which prohibited and penalised the holding or transferring or receiving of demonetised currency.
The dissenting judgement:
- While the measure was “well-intentioned”, it was to be declared unlawful purely on legal grounds as the record demonstrates that there was no independent application of mind by RBI.
- Violation of Section 26(2), as the proposal for demonetisation, is to emanate from the central board of the RBI and the demonetisation has to be done through legislation rather than through executive notification.
Conclusion: Most policy decisions carry the risk of unintended consequences, which must be carefully balanced against the potential benefits of such decisions.
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