India & Demonetisation: Six Years On, Does SC Verdict Uphold Democracy at Large?

The 4:1 majority verdict supported PM Modi’s 2016 notes ban, where majority observed the Centre couldn't be faulted.

5 min read
Hindi Female

The Supreme Court's Demonetisation verdict, apart from the manifold reactions it attracts, stresses the need to contextualise the matter from a socio-economic perspective.

The Centre earlier said that demonetisation was a “well-considered” decision and part of a larger strategy to combat the menace of fake money, terror financing, black money, and tax evasion.

Gautam Bhatia, a constitutional law scholar, recently wrote an excellent piece discussing the constitutionality of the deliberated matter by the apex court and the pressing constitutional issues in hand here, particularly of “judicial evasion” committed by the Supreme Court seen to be acting in favour of the Executive.

This is not the first instance where the court has acted in favor of the executive, without undertaking a thorough juridical review of the proceedings.

I quote Bhatia, here:

“A large number of the orders after 16 December 2016, involve the court granting ‘one final opportunity’ to the respondents to file counter-affidavits. Ultimately, what the record reveals is that the Supreme Court simply wasn’t interested in hearing the demonetisation case while its orders may still have had some bite.

This is why, despite the petitioners’ gallant attempts to demonstrate that the issue is not academic, one is left distinctly unconvinced. Because even if this bench were to buck the trend of judicial deference to the executive, find that demonetisation was unconstitutional, and lay down standards and principles ‘for the future’, this would be of no use if, when that hypothetical future arrived, a future court once again simply evaded deciding the case until it became a fait accompli.

As the long-pending challenges to the reading down of Article 370 and the constitutionality of electoral bonds show, judicial evasion remains very much a part of the court’s repertoire at the moment.”

Even if we leave aside the juridical matter, as important as it is to understand why the apex court continued ‘evading’ the matter, both in discussing its process, and substance, when it challenged and up for legal discussion for so long, unfortunately, the ‘economic argument’ examining the ad hoc policy of demonetisation and/or its impact on the economy finds little focus, both amongst the executive and on the judiciary’s end (which it could have prioritised on a Suo Moto basis in public interest).

This signals not only a constitutional crisis plaguing India’s institutional architecture but also a crisis of accountability in the nation, being hailed as a “mother of democracy” in the Modi Government’s G20 Presidency PR campaign. Is there any acknowledgment beyond academic discourse that the policy was an absolute disaster?

Even legally, as the dissenting opinion itself observes, documents and records submitted by Centre and the Reserve Bank Of India (RBI), which included phrases like "As desired by the Central Government", show there was "no independent application of mind by the RBI".

Read this in context to what Raghuram Rajan, the RBI Governor then, had already said, that he made it clear in any consultation made with the Government that demonetisation was “not a good idea” and that its implementation was “not well planned”.

Examining the Economic Effects of Demonitisation Shock


Demonetisation occurred in an otherwise stable macroeconomic environment and did not affect other aspects of monetary policy such as the liabilities of the RBI, or the target interest rate.

Eventually, more than 99% of the demonetised currency was converted into deposits, so that the broader monetary aggregates such as M3 (an indicator used for accounting money supply) did not change.

In a 2019 study examining the economic effects of demonetisation undertaken by Gita Gopinath, Prachi Mishra, Abhinav Narayanan and Gabriel Chodorow-Reich, the authors observed that districts which experienced more severe ‘demonetisation shocks’ had:

  • larger contractions in ATM withdrawals;

  • larger reductions in economic activity, as measured by satellite data on human-generated nightlight activity and a survey-based measure of employment;

  • slower credit growth; and

  • faster adoption of alternative payment technologies, such as e-wallets and point-of-service cards.

The 4:1 majority verdict supported PM Modi’s 2016 notes ban, where majority observed the Centre couldn't be faulted.

Observations from 2019 study examining economic effects of demonitisation

Image: Namita Chauhan/The Quint


The study noted:

“These cross-sectional patterns (shared in the above Figure) are evidence against the neutrality of money during India's demonetisation. They also shed light on the special role of currency in modern India. During demonetisation, broad money aggregates (like M3) did not change but output nonetheless, fell. However, the cross-sectional difference in output implied by these figures is vastly smaller than the decline in currency itself. This difference suggests that individuals found ways to avoid using legal tender to conduct transactions, for example by convincing retailers to open an informal line of credit, or to accept old notes, or by switching to electronic forms of payment. The analysis suggests that two substitutions were e-wallet payments and debit cards.


From Eradicating Black Money To Bid for Digital India: How Govt’s Tone on Cash Ban Changed

This author, first wrote about the probably/likely failure(s) of the demonetisation’s policy objective right after the announcement was made. The Modi government, later realising its mistake, continued to shift the goal post on defining the objectives of its ill-thought and timed policy: from first stating the objective was aimed at minimising black money generation and fighting corruption, to (later) arguing for its case in helping generate digital transactions (as a way to ‘formalise’ money transactions).

The 4:1 majority verdict supported PM Modi’s 2016 notes ban, where majority observed the Centre couldn't be faulted.

Indian Monetary Reform, Employment and Digital Payments

Image: Namita Chauhan/The Quint


As the above study’s evidence also suggests, people across districts resorted to digital payments not because of the fact that they were given ‘an incentive’ to do so, but because of a ‘crisis-driven response’ that a shock like demonetisation had caused.

Rural areas that are otherwise more cash-dependent, struggled for months for ensuring basic payments. Most MSMEs, and many other small and medium-scale enterprises across urban areas, almost never fully recovered from the shock. Not only did overall output fall dramatically across India but also its macro-growth trajectory almost never recovered to pre-demonetisation levels afterwards.

After almost six years of India’s most bizzare (and perhaps, buffoonish) policy experiment, apart from the crisis of constitutionality, perpetuated by the apex court in juridically evading the matter of demonetisation, as Bhatia argues, what we still do not have is a clear picture of fixing accountability to the executive.

In what Modi Government calls a ‘mother of democracy’, the real effects of demonetisation may well be unknown beyond a body of academic work but the extent to which the measure actually wreaked havoc in the lives and livelihoods of the common citizenry especially the poor, marginalised, disposed classes.

(The author is Associate Professor of Economics, OP Jindal Global University. He is currently Visiting Professor, Department of Economics, Carleton University. He tweets @Deepanshu_1810. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

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