The New Year started with a sizzling debate as the Supreme Court passed its decision upholding the validity of demonetization in Vivek Narayan Sharma v. Union of India. Demonetization? Yes, the very exercise that resulted in long queues outside banks and economic disturbance in 2016.The decision was passed with a 4:1 majority. The majority found no flaw in the process that was followed for demonetization, as the measure satisfies the four-pronged tests of proportionality. But the sole woman judge on the bench dissented from the majority opinion and opined that demonetization should be declared unlawful on legal grounds.
What actually happened in 2016?
On November 8, 2016, the Central Government of India declared the Mahatma Gandhi Series of Rupees of 500 and 1000 denominations as illegal tender. It also declared the issuance of new banknotes for Rs. 500 and Rs. 2000. This declaration was made by way of official gazette notification. Later, on December 28, 2022, the Specified Bank Notes (Cessation of Liabilities) Ordinance was issued, and later in 2017, an act was passed.
This declaration of demonetization had many effects, like cash shortage, a reduction in industrial production, a reduction in the GDP growth rate, etc. It created disturbance, and people had to stand in lengthy queues to get their notes exchanged. Not only this, even the objectives of demonetization were not completely met. These were some of the reasons why people approached the court, and 58 petitions were filed in the Supreme Court against demonetization.
Legal Relevance of the Objectives and Efficacy of Demonetization
The petitioners approached the court, claiming that the objectives of demonetization were illusionary and unfulfilled. In the judgment, the court observed that it was irrelevant whether the objectives of demonetization were met or not. Also, in the dissenting opinion, Justice Nagarathna added that the measure of demonetization was well intentioned and well thought of, but the measure is declared unlawful on purely legal grounds and not on the basis of objectives. This shows that the objectives of demonetization are completely irrelevant from a legal point of view.
The court also refused to entertain the claims regarding the inefficacy of the measure. Justice B.V. Nagarathna said that 98% of bank notes were exchanged, which shows the measure was not as effective as it sought to be. But the court cannot base its decision on such a consideration.
Protecting the Sanctity of Separation of Powers.
Was the Supreme Court right in taking up matters related to economic policy?
The petitioners approached the court with a lot of problems related to demonetization, like false, unfulfilled objectives, unplanned action, horrendous consequences, and the illegal procedure. The Supreme Court, however, did not go into whether the policy of demonetization was effective or not. It protected the separation of powers by taking only the validity of procedure into question and not the efficacy.
The court decided the scope of judicial review according to the judgment of the case Tata Cellular v. Union of India. The top court observed that the decision cannot be judicially reviewed as it was the centre’s economic policy. The Supreme Court understands that it is not supposed to interfere with matters of economic policy and that it is important to protect the sanctity of separation of powers as enshrined in the Indian constitution. The bench added, “There has to be great restraint in matters of economic policy.” “The court cannot replace the executive’s wisdom with its own.”
6 Tests to Determine Legality
There were six main questions that the court dealt with in order to determine the legal validity of the process that was followed for demonetization. The court checked the entire process, from consultation to declaration of demonetization, and reached the conclusion that the process was legally valid.
The first question was whether declaring demonetization by way of an official gazette notification was valid or not. The court opined that it was valid.
Secondly, the majority decided that “any series” under Section 26(2) of the RBI Act amounts to all series, and hence the government was legally right in declaring all currency notes of rupees 500 and 1000 as illegal tender. The court also gave a very pertinent example to explain the reason behind such an interpretation. Assume there are 20 series of a particular currency denomination and the government demonetizes 19 of them. This will lead to chaos and confusion in the minds of the public. Such an interpretation will lead to absurdity. Therefore, the court did not give a restrictive meaning to the word “any.”
The third question to be taken into consideration was whether the consultation process as given in Section 26(2) of the RBI Act was followed. Section 26(2) specifies the need for a recommendation from the Central Bank to demonetize currency notes by official gazette notification. the court held that the process was valid as per Section 26(2) of the RBI Act even if the proposal did not emanate from the Central Board of the RBI. This is because in an important decision like demonetization, the Central Government and RBI cannot be considered as two isolated boxes. Moreover, the records reveal that the matter was under consideration for a period of six months before the government came up with the decision. The court also referred to the dictionary meaning of the word “recommend” and then decided that the procedure has been followed and, therefore, the process of demonetization passed this test as well.
The fourth test was the test of proportionality. The petitioners claimed that demonetization did more harm than good, but this claim was rejected by the court as the measure satisfied the four tests of proportionality. The purposes of demonetization are proper purposes; the action had a reasonable nexus with the objective; there could be no alternative measures; and there was a proper relation between the importance of these purposes and the limitations on constitutional rights.
The fifth question was whether the period specified for exchange was reasonable. The majority held that a period of 52 days was specified, which was reasonable.
The Dissenting Opinion
Justice B.V. Nagarathna dissented from the majority opinion and held demonetization to be unlawful. Although she declared demonetization to be invalid, she said that no relief can be granted retrospectively in the matter since the measure has already been taken and six years have passed since. She based her dissent on a lot of points.
First of all, she sensed a problem in the origination of the proposal for demonetization. In 2016, the Central Government originated the proposal for demonetization under Section 26(2) of the RBI Act. But according to Justice Nagarathna’s interpretation of Section 26(2) of the RBI Act, the proposal should emanate from the Central Board of the RBI. If the government wants to be the one to initiate, it should pass parliamentary legislation or an ordinance (if secrecy is needed). The central government has such authority under Union List’s Entry 36. But in actuality, the proposal emanated from the central government, and the RBI’s opinion was sought. This cannot be called a “recommendation” under 26(2) of the RBI Act.
In her opinion, demonetizing the whole series of rupees 500 and 1000 was a serious matter and therefore should have been done by parliamentary legislation or ordinance. Merely issuing a gazette for this purpose is legally invalid.
Thirdly, she opined that the opinion of the central bank was not frank and independent as the entire process of consultation took place in 24 hours. It looked like the Central Bank merely approved Centre’s desire for demonetization.
The fourth problem that she stated was that Parliament was not consulted. Parliament, as a miniature of a democratic country, cannot be ignored in such an important matter.
Next, in her opinion, “any series” under Section 26(2) of the RBI Act did not amount to “all series.”
Implications of the Judgment
The Supreme Court asserted that its decision has purely “academic merit” and will not have any bearing on the government’s decision to implement demonetization. Nevertheless, it will affect the government’s future decisions as well as how the public views the judiciary’s function in the nation. The ruling undoubtedly drew a line in the sand between the executive and judicial branches of government, which had been beginning to blend in recent days.
The top court’s decision is very significant for it not only upholds a very important executive decision taken by the government but also preserves the sanctity of separation of powers as enshrined in the constitution. Plus, trying to reverse the measure of demonetization would have been like unscrambling a scrambled egg or turning the clock back, as the Centre argued. Even Justice Nagarathna agreed with this. Justice Nagarathna’s interpretation is also a very important part of the judgment. She gives a different perspective of the procedure which brings up new questions like whether RBI is autonomous in discharging its duties. This leaves the door open for even more interpretation.
This Article is authored by Bhavya Sharma, Second Year Student at Rajiv Gandhi National University of Law.