Arbitrary? Unconstitutional? Is Demonetisation Legal?

The power exercised by Narendra Modi and his government has been wielded lawfully, writes Alok Prasanna Kumar.

5 min read
Hindi Female

Following the decision of the Union Government on 9 November 2016 to demonetize the 500 and 1000 rupee notes in circulation, at least four Public Interest Litigations challenging this have been filed in courts across India.

One which was filed in the Madras High Court was dismissed by the Court with the observation that demonetisation was good for India. Likewise the PIL filed in the Karnataka High Court was dismissed by the Court. A PIL filed before the Bombay High Court is pending, whereas the one filed in the Supreme Court will be heard next week by a bench headed by Justice AR Dave.

If the Madras High Court and Karnataka High Court’s approach is anything to go by, it is quite likely that the Supreme Court will also summarily dismiss these PILs.


Is There a Legal Basis for Demonetisation?

The legal basis for the order demonetizing currency can be found in Section 26 of the Reserve Bank of India Act, 1934. Under sub-section (2) of this Section, the Union Government is given the power to declare that any notes issue by the Reserve Bank will no longer be legal tender.

The only procedural requirement is that the Board of the RBI recommends the same to the Union Government.

This power is what has been exercised by the Narendra Modi led Government, and no one can argue that the Union Government has not exercised the power lawfully.

The power exercised by Narendra Modi and his government has been wielded lawfully, writes Alok Prasanna Kumar.
People wait outside ATM kiosks after Prime Minister Narendra Modi announced demonetisation of Rs 1000 and Rs 500 notes in New Delhi on 8 November, 2016. (Photo: IANS)

The earlier round of demonetisation, when Rs 500, Rs 1000 and Rs 10,000 notes were demonetized in 1978, also ostensibly to curb black money circulation was carried out under a special legislation, namely the High Denomination Bank Notes (Demonetisation) Act, 1978.

The persistence of the black money problem suggests it was not an entirely successful move.

But Isn’t It Arbitrary and Unconstitutional?

The constitutional validity of this law was challenged before the Supreme Court of India in Jayantilal Ratanchad Shah v Reserve Bank of India on the basis that it was a violation of the right to carry out trade and commerce, and in addition, amounted to a compulsory acquisition of property without compensation by the Government.

Rejecting both these contentions, a Constitution Bench of the Supreme Court held that the such a demonetisation law was in public interest, given its purpose to control the problem of “unaccounted money” and didn’t in any way, amount to a violation of the right of the petitioners.
The power exercised by Narendra Modi and his government has been wielded lawfully, writes Alok Prasanna Kumar.
Unable to dispense change, several chemists had shut shop. (Photo Courtesy: Basil Baby)

The Court also did not find the mechanism for return of the high denomination to be unreasonable or in any way arbitrary or unconstitutional.

Since the process by which demonetisation has taken place is like that prescribed under the demonetisation law, it is quite likely that the Supreme Court will apply the law laid down in this case and dismiss the challenge to the present demonetisation exercise.


Will Removing 84% Currency Help Curb Black Money?

The petitioner in the PIL before the Supreme Court also contends that he is not per se against the demonetisation exercise but only the way it has been carried out, ie, giving a notice of four hours before which Rs 500 and Rs 1000 notes cease to become legal tender.

The argument is made not only on the right to trade and commerce but because the right to life is affected given the difficulties it would pose for the citizens. It is also contended that the limits on withdrawal are too small and unhelpful in the present scenario.

It is no doubt true that there are vast differences in the economic scenario in India between 1978 and 2016.

The value of high denomination notes in circulation 1978 was a mere Rs 130 crores – unlike the present situation where the value of high denomination notes in circulation is Rs 14.18 lakh crore or 84% of the value of all notes in circulation.
The power exercised by Narendra Modi and his government has been wielded lawfully, writes Alok Prasanna Kumar.
Demonetization of currency notes happened back in 1978 too. Photo used for representational purpose. (Photo Courtesy: Wikimedia commons)

It cannot be disputed that the impact on the wider economy is much larger and we are yet to fully fathom what will be the impact of this demonetisation exercise on the wider public.

A much wider section of the population is affected by the present demonetisation exercise than the previous one given the prevalence of the high denomination notes.


Time to Rethink?

Should the Supreme Court then re-think its earlier precedent in Jayantilal Ratanchand Shah’s case and re-examine the merits of this decision?

There are good reasons why it should not.

For one, the Supreme Court has always had a hands-off approach when it comes to matters of economic and fiscal policy, allowing the Government or the concerned regulatory body to take the call.

The principled reason being that this lies entirely within the domain of the Executive wing of government and not within the judicial function. The pragmatic reason being that the court has no real way of assessing which economic policy or measure would be better as compared to the others.

However, if an economic policy or measure directly impacted the fundamental rights of citizens, to that extent the court will interfere, but the Court has maintained its hands-off approach rather consistently. Unless the rights violation or illegality is patent and obvious on the face of the measure or policy, it is unlikely to be interfered with.

In such a situation, it is highly unlikely that the Supreme Court will interfere in the demonetisation process.

Whatever ill effects, pain and inconvenience that citizens are facing in the present scenario, it is best left to the Union Government to resolve.

(Alok Prasanna Kumar is Senior Resident Fellow of the Vidhi Centre for Legal Policy, based in Delhi and has practised as an advocate in the Supreme Court of India.)

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Topics:  Narendra Modi   Supreme Court   Black Money 

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