Bottling The Genie Of Demonetisation

The Supreme Court has upheld the legality of the ‘Noteban’ by a 4-1 verdict. It would have been better had the decision come 6 years ago.

The issues before the Court for adjudication do not change by delay. The Court was neither expected nor equipped to assess the consequences and impact of the decision and so is the case now, 6 years later.

The executive power of the union government is co-extensive with the legislative power of the Parliament, which covers the subjects — ‘Currency, coinage and legal tender’ and ‘Reserve Bank of India’ (Article 73 of the Constitution, read with Entry 36 and 38 of the Union List.)

Section 26(2) of the Reserve Bank of India (RBI) Act, 1934 authorises the central government to declare that ‘any series of bank notes of any denomination’ shall cease to be legal tender from specified date except ‘at such office or agency of the Bank and to such extent as may be specified in the notification’.

The government may issue such a notification on the recommendation of the RBI.

Before the RBI Act was enacted, the currency management was directly handled by the government. The Act has created a professional body corporate, to manage the currency, but the ultimate power to demonetise rests with the government.

Certainly, in currency management, the government has an information edge by way of intelligence inputs over the information available to the RBI.

The power of the government to cancel any series of banknotes is discretionary (government MAY notify) and the RBI renders ‘recommendation’ not a binding directive. Thus, the ultimate power and responsibility rests with the government as per the law (RBI Act).

The majority upheld the legal power of the government to order that certain notes would no longer be legal tender and need to be exchanged with new notes through bank accounts.

The petitioners had contended that the central government had initiated the proposal for demonetisation and sought opinion of the RBI’s central board through a letter dated 7 November 2016.

The central board met on 8 November 2016 at 5.00pm, just hours before the announcement of the government decision on national television by the Prime Minister. The board at the time had only 3 non-government directors — against sanctioned strength of 10 — and thus had majority directors representing the central government.

However, majority judges noted that the government and RBI had been discussing the related issues for last six months and by implication the government proposal was not sudden.

The government proposed demonetisation as a response to the problems of fake currency, black money, terror finance etc. and to promote financial inclusion and digital payments. Further, decisions of the central board cannot be faulted by dint of any vacancy as per the RBI Act itself.

The sole dissenting judge observed that that the RBI did not make a demonetisation recommendation suo moto. Rather it reacted in the affirmative to the government’s proposal made just a day before the notification (on 7 November 2016).

The RBI did not have enough time to study pros and cons of the specific demonetisation proposal, which was made by the government for the first time only on 7 November. Further, the judge ruled that cancellation of all series of 500/1,000 banknotes in circulation by gazette notification was legally not in order. It required specific enactment of law by the Parliament.

The petitioners had pointed out that on two earlier occasions, ‘all series’ of high denomination banknotes were demonetised by enacting special laws by issuing Ordinances in 1946 and 1978.

The Ordinances were later converted into Acts of Parliament. Majority found that on both these occasions, the then RBI governors were not in favor of demonetisation (and that is why Ordinances were issued).

Majority judges found that S.26(2) of the RBI Act enabled demonetisation of ‘any series’ of bank notes through gazette notification and ‘any series’ could as well mean ‘all series’ of a particular denomination.

Whether in Parliament or in Supreme Court, the majority view prevails.

Decisions by unanimity is a matter of chance, not a practical governance mechanism. One would seldom find any decision, especially government decision, being liked by everyone.

People possess different knowledge, information, skills, motivations and carry different lenses to examine and opine on any issue. I too have my own. As an auditor, I can also point to scores of aspects which are right or wrong or plainly questionable, but all need to be weighed in golden balance before arriving at a conclusion or opinion.

In matters of economic policy, the scope of judicial review is rather limited because the judges are not experts to dwell upon the substance and merits/demerits of the policy.

Whether the decision was right, wise, or good, is not for the court to decide. That is the domain of accountability of the government to the general public in a democracy.

The only yardstick for a court to judge a decision is whether it is legally correct, free from malafides, based on some material (whose adequacy or analysis would be beyond judicial scrutiny).

This verdict also has extensive quotes to this effect.

There are matters regarding which the judges and the lawyers of the courts can hardly be expected to have much knowledge, by reasons of their training and expertise.

Economic and fiscal regulatory measures are a field where judges should encroach upon very warily, as judges are not experts in these matters. The correctness of the reasons which prompted the government in taking one course of action instead of another, is not a matter of concern in judicial review and the court is not the appropriate forum for such investigation.

The policy decision must be left to the government, as it alone can adopt which policy should be adopted after considering of the points from different angles. In assessing the propriety of the decision of the government, the court cannot interfere, even if a second view is possible from that of the government.

Legality of the policy, and not the wisdom or soundness of the policy, is the subject of judicial review.

When I heard the Prime Minister’s noteban announcement, my first reaction was that it was a masterstroke to compel people to tender the cash to banks at a time when commercial banks were almost fully digitalised.

The tendering of cash in bank accounts would establish a digital trail. I myself had balance of Rs 20,000 I had withdrawn from ATM, a few days back and I reckoned that only people troubled by the decision would be those with hidden sources of income and wealth.

Of course, I was unaware that the government and banks were UNPREPARED to deal with the aftermath. Managing surging crowds, recalibration of large number of ATMs, delayed supply of fresh currency — all resulted in big chaos that ensued in coming months.

Practically all cancelled notes under circulation came back to banks, but is now digitally trackable. The Supreme Court was informed that Rs 10,719 crore of cancelled notes are still in circulation.

Till 17 December 2016, cash deposits of Rs 80 lakh or more added up to nearly Rs 4 lakh crore, which flowed into 1.14 lakh accounts. More than Rs 31,300 crore were deposited in dormant accounts. All these accounts became targets of tax scrutiny. The taxmen’s work may still be incomplete.

We hope that the common people who suffered the hardship for a good cause would eventually not be disappointed, once all cases of tax evasion are investigated and due taxes realised. It was a well-intentioned decision but the system’s lack of preparedness to deal with the aftermath was telling.

When the batsman hits a powerful sixer, one section of the stadium (if not the whole stadium) bursts in applause, but some spectator may get hurt, may be badly hurt, depending upon his vulnerability. It was one such sixer.

On the economic impact, the opinion is sharply divided on political lines.

In my view, the long-term gain far outweighed the short-term pain. The resultant push to Digital Payment ecosystem, massive increase in tax compliance, big boost to capital market through forced formalization of savings — has all imparted a strength to the economy resulting in a standout economy, in the currently gloomy global situation.

(This piece was originally published on Dr Subhash Pandey's Facebook wall. It has been republished here with permission.)