In a recent development, the Supreme Court passed a verdict on the demonetisation of INR 500 and INR 1,000 currency notes. The verdict was delivered by a five-judge Constitution Bench, which ruled in favor of the government’s decision 4-1. This article delves into the details of the ruling and represents an overview of the verdict, its implications, and the concept of demonetisation.
Supreme Court’s Verdict on Demonetisation
The majority ruling upheld that the Centre’s notification issued on November 8, 2016, was valid and met the test of proportionality. This decision came after six months of consultation between the Reserve Bank of India (RBI) and the Centre. The court noted that the statutory procedure under Section 26(2) of the RBI Act, 1934, wasn’t violated even though the Centre took the initiative to advise the Central Board to consider recommending demonetisation.
Assessment of the Decision
The court asserted that the government had the power to demonetise “all series” of banknotes, and such decisions need utmost confidentiality and speed to avoid disastrous consequences if leaked. The purpose of the decision was to eliminate fake currency, black money, and terror financing.
Dissenting Opinion
However, the minority opinion held that the government’s notification was unlawful as it ought to have been initiated by the RBI following a recommendation under Section 26(2) of the RBI Act. In cases where the government initiates demonetisation, it should take the opinion of the RBI with the Board’s opinion being independent and candid. If the Board’s opinion is negative, the Centre can still proceed with the demonetisation exercise but only by announcing an ordinance or by passing a parliamentary legislation.
The Principle of Proportionality
The test of proportionality is a legal method used in judicial rulings where two or more legitimate rights clash. It posits the administrative measure implemented must not be more drastic than necessary to reach the desired result.
What was Demonetisation?
On November 8, 2016, the Indian government declared that INR 500 and INR 1,000 notes were demonetised immediately, ceasing their status as legal tender. The primary objectives were to discourage illegal transactions involving high-denomination notes, curb black money, and promote the digitisation of commercial transactions to enhance government tax revenues.
Operation Clean Money
Following demonetisation, the Income Tax Department launched ‘Operation Clean Money’ to verify large cash deposits made between 9th November and 30th December 2016. If transactions made during this period didn’t match the tax status of the taxpayers, tax enforcement action would be taken.
Impact on Economy
Demonetisation resulted in a significant reduction in currency circulation, from INR 17.97 lakh crore on November 4, 2016, to INR 7.8 lakh crore in January 2017. This move led to a decline in GDP growth by nearly 1.5%, caused small units and shops to shut down, and created a liquidity shortage as businesses struggled to find necessary cash for urgent needs and valuable projects.
The Way Forward
Despite critiques, demonetisation marked a bold step to counter black money and parallel economy threats. It signaled international circles of economic power about India’s determination to tackle issues obstructing its economic growth story.