Unlike 1978, Demonetisation in 2016 Violates Fundamental Rights

Unlike 1978, demonetisation in 2016 has violated fundamental rights in more ways than one, writes Chandni Sharma.

5 min read

In India, demonetisation has been announced twice before by the government. The first was in in 1946, when all Rs 500, Rs 1,000 and Rs 10,000 notes printed before 13 January 1946 were scrapped. The second was initiated by the Janata Party in 1978 through the High Denomination Bank Notes Act, which scrapped the old Rs 500, Rs 1,000 and Rs 10,000 notes. The purpose was to curb black money for public good, and the notes scrapped consisted of roughly 2 percent of the total cash in circulation.

Also Read: Modi’s Shield Against Black Money Will Boost Garib Kalyan Economy


Infringement of Rights

  • Any government order needs to be ratified by Parliament as was done in 1978 by the introduction of High Denomination Bank Notes Act.
  • Sec 26(2) of the RBI Act 1934 has provision for demonetisation of a series of notes and not the complete denomination of Rs 500 and Rs 1,000 notes.
  • Failure to issue an ordinance for the latest demonetisation drive has led to RBI issuing several circulars which may have violated citizens’ rights.
  • Note ban has affected the Right to Trade under Article 19(1)(g), the Right to Movement under Article 19(1)(d) and the Right to Life

Constitutional Validity of Demonetisation

Several PILs were filed against demonetisation in 1978. The most prominent case was Jayantilal Ratanchand vs Reserve Bank of India and ors, which challenged the constitutional validity of demonetisation, stating that it affected the right to trade under Article 19(1 )(g) which is one of the fundamental rights guaranteed by the Constitution.

The current order passed on 8 November 2016 was declared by the government as a decision taken for public good. Since then, the move has been viewed as a violation of several legal aspects.

The high courts of Karnataka and Tamil Nadu dismissed public petitions against demonetisation stating that the decision was taken for public good, whereas the High Court of Bombay stayed the petition for further hearing.

A petition was also filed in the Supreme Court by advocate VK Biju who argued that demonetisation, being an important part of the monetary policy, cannot be left under total control of the Centre. The Supreme Court questioned the legality of the drive and the procedure which was adopted.

The Supreme Court also refused to deny the filing of PILs in high courts as it viewed this to be the only way to maintain order and prevent civil unrest following demonetisation. The court, however, refrained from directly interfering in the matter as it does not view the move to have violated any rights.

In a democratic country like India, any decision is to be passed through Bills which are debated, signed and then approved in the Parliament. A similar approach was taken by the government when it introduced the High Denomination Bank Notes Act in 1978.

Also Watch: Kya Hua Tera Vaada? Modi’s Broken Promises on Demonetisation


RBI Act Contradicts Govt Order

Under section 26(2) of the RBI Act, 1934, the government, upon approval from the Central Board of RBI, can pass a notification to discontinue a series of denominations as legal tenders. The provision of Sec 26 (2) only provides for demonetisation of a series of notes and not the complete denomination of Rs 500 and Rs 1,000 notes.

This casts doubt on the constitutional validity of the notification dated 8 November 2016, since in order to carry out a total discontinuation of a denomination, the proposal would first need to be presented to the Parliament.

However, in the case of LDA v MK Gupta and Sk Mohammed Omar v Collector of Customs, the Supreme Court had held that the term ‘any’ includes ‘all’, which implied that ‘any series’ in Section 26 of the RBI Act in all circumstances should include ‘all series’, giving it a restricted meaning within the rules of law. This argument as pointed out by the Supreme Court was followed when ordinances were passed for demonetisation in 1946 and in 1978, but since there was no ordinance passed for the drive in 2016, the same rule of law cannot be considered.

During the 1978 demonetisation drive, the Supreme Court with respect to Article 300A – which is the right to property – had observed that demonetisation as an action was not merely done on the basis of regulation of property but included compulsory recovery of debt owned through untaxed money.

While the previous demonetisation drives in 1946 and 1978 were based on ordinances, the failure to issue an ordinance for the recent demonetisation has resulted in many rules being released by the RBI which is said to have been discriminating between account holders and non-account holders. The government has failed to establish that 100 percent of its citizens have bank accounts and is said to have violated Article 14 of the Constitution – the Right to Equality.

Unlike 1978, demonetisation   in 2016 has violated fundamental rights in more ways than one, writes Chandni Sharma.
(Photo: Rhythum Seth/ The Quint)

Violation of Fundamental Rights

The struggle of the citizens has affected the Right to trade under Article 19(1)(g), the Right to movement under Article 19(1)(d) and the Right to life under Article 21 of the Constitution.

The government can impose reasonable restrictions of fundamental rights in order to achieve a goal for public good, but needs to prove the restrictions as reasonable. Unlike the previous demonetisation drive in 1978 where the move affected 2 percent of the cash in circulation, the step in 2016 has impacted 86 percent, causing inconvenience to the common man.

Cash transactions make up 64 percent of the total transactions in India and the move has left daily wage workers without money, small and medium businesses are unable to pay salaries and several shops have been forced to remain shut due to lack of cash. The move for a cashless economy is positive, but reports published by the State Bank of India show that a shortage of PoS machines and other facilities is hindering progress.

Practically speaking, it would be impossible for small businesses based in rural areas to benefit from a digital economy as transactions in businesses such as poultry farms or fisheries usually take place via cash. Unless the government sorts out security issues, the shortage of PoS machines and the practical aspects of a cashless economy, the transition would bring in more problems rather than solutions.

Also Read: All the Notifications, Clarifications, Changes Since Note Ban


Bold Initiative

In the long term, demonetisation will definitely lead to a more transparent and clean economy in India. The government should look into the difficulties being faced by the common man and try and build trust again.

The step of demonetisation has been a bold one, but lack of planning and neglecting the legal aspects has made it seem a little unjust towards the citizens.


(The writer is a law student and can be reached @chandni301093. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

Also Read: Note Ban: In Rush to Go Cashless, the Old Have Been Left Behind

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