Demonetisation Well-Considered, Led To Benefits; Consultation With RBI Began In Feb 2016 : Centre Tells Supreme Court
The 2016 banknote demonetisation was a major step to fight "the menace of fake currency notes, storage of unaccounted wealth, and financing of subversive activities" and was not a "standalone or isolated economic policy action", submitted the Union of India in an affidavit. This policy was "a well-considered decision" and "an important action" in a series of economic policies and events,...
The 2016 banknote demonetisation was a major step to fight "the menace of fake currency notes, storage of unaccounted wealth, and financing of subversive activities" and was not a "standalone or isolated economic policy action", submitted the Union of India in an affidavit. This policy was "a well-considered decision" and "an important action" in a series of economic policies and events, that were aimed at "strengthening and expanding the formal economy, diluting the informal economy, rooting out of black money, and eradicating fake currencies", the Centre informed the apex court. The Central Government further stated that it had also been in consultation with the Reserve Bank of India about the proposed policy since February of that year.
The Centre said that demonetisation led to several benefits such as reduction of fake currency notes, increase in digital transactions, increased detection of unaccounted income. The volume of digital payment transactions increased manifold from 1.09 lakh transactions with the value of Rs 6952 crores in 2016 to 730 crore transactions of the value of more than Rs 12 lakh crores in the single month of October 2022.
"The overall impact of demonetisation on economic growth was transient, with real growth rate being 8.2 % in FY 16-17 and 6.8% in FY 17-18, both being more than the decadal growth rate of 6.6% in the pre-pandemic years", the affidavit filed by the Ministry of Finance stated.
This affidavit was submitted by the Centre in response to a batch of petitions challenging this controversial policy of the government by which 86% of currency in the economy was withdrawn from circulation. Nearly six years after the controversial demonetisation of high-value currency notes of Rs 500 and Rs 1000, a Constitution Bench of the Supreme Court on October 12 had begun hearing a batch of 58 petitions challenging the November 8 circular issued by the Ministry of Finance that set the ball rolling. The five-judge Bench comprises Justices S. Abdul Nazeer, B.R. Gavai, A.S. Bopanna, V. Ramasubramanian, and B.V. Nagarathna.
In India, there have been two prior episodes of demonetisation. The first instance in modern-day India was in 1946, when the British government pulled the Rs 1000 and Rs 10000 notes from circulation. Three decades later, the Janata Party-led government under the prime ministership of Morarji Desai demonetised Rs 1000, Rs 5000, and Rs 10000 in 1978, against the wishes of the then Governor of the Reserve Bank of India, I.G. Patel. A common thread running through these episodes was the enactment of separate legislations to carry out the exercise of demonetisation. In 1946, the Viceroy and Governor General of India, Sir Archibald Wavell, promulgated the High Denomination Bank Notes (Demonetisation) Ordinance, while in 1978, the High Denomination Bank Notes (Demonetisation) Act was brought into effect by the Parliament, replacing an ordinance of the same name. In reference to these, Senior Advocate P Chidambaram asked the Constitution Bench hearing the challenge against the 2016 demonetisation –
"If Section 26 gave the Government this power, then why were separate acts enacted during the earlier demonetisations in 1946 and 1978? If the power was there, why did the 1946 and 1978 Acts start with the words 'notwithstanding anything contained in Section 26'? The Parliament felt that this kind of power was not there. Can the Government exercise this power without a parliamentary enactment or a debate?"
In response to this criticism, the central government has clarified that the impugned notification "did not extinguish the liability of the Reserve Bank of India or the Union of India. "For the cessation of those liabilities, the Specified Bank Notes (Cessation of Liabilities) Act, 2017, was enacted by the Parliament. That Act states that "the specified bank notes which have ceased to be legal tender, in view of the notification of the Government of India in the Ministry of Finance, issued under sub-section (2) of Section 26 of the Reserve Bank of India Act, 1934, shall cease to be liabilities of the Reserve Bank under Section 34 and shall cease to have the guarantee of the Central Government under sub-section (1) of Section 26," the Centre has informed the five-Judge Constitution Bench.
The validity of the note-bandi exercise, the Union has maintained, though "valid in itself" has "also been affirmatively taken note of by the Parliament" in the 2017 Act. "Given the above, any challenges to the notification per se no longer survive," it has been asserted. Both the 1946 and 1978 episodes had their "distinct historical background, distinct context and aspects or factors", the Centre has also supplied, noting its objection to the petitioners' efforts to compare the most recent demonetisation exercise with the past precedents.
Repelling the contentions of the petitioners that the decision-making process was "deeply flawed" and its implementation equally faulty, the Centre has told the court that the 2016 demonetisation was "a well-considered decision", taken after "extensive consultation with the Reserve Bank and advance preparation". The Government consultation with the Reserve Bank began in February of the year, although "the process of the consultation and the decision-making were kept confidential". In the affidavit, the Union has also outlined the various measures taken during the preparatory stage, including the printing of banknotes of the new series, which was done under "the constraint of secrecy and confidentiality".
Finally, various measures taken by the government to "mitigate the inconvenience caused to the public", especially in the agricultural sector, have also been highlighted. "All possible measures were taken to mitigate inconvenience to the public and reduce the disruption of economic activities. The short-term inconvenience and disruptions have to be seen in the larger context," the Union has told the court.
Finally, it is submitted by the Centre, that the Constitution Bench "may not be persuaded to further engage on dealing with the legality of the notification". The Supreme Court has generally refrained from judicial review of decisions in the realm of economic policies, the government affidavit reminds.
Case Title
Vivek Narayan Sharma v. Union Of India [WP (C) No. 906/2016] and other connected matters