Context: Recently the Supreme Court upheld the government’s decision to demonetise currency notes of Rs 500 and Rs 1,000 by a 4:1 majority and rejected all 58 petitions against it.

Background

2016 demonetisation

• On 8 November 2016, the Government of India announced the demonetisation of all Rs 500 and Rs 1,000 banknotes of the Mahatma Gandhi Series.

• It also announced the issuance of new Rs 500 and Rs 2,000 banknotes in exchange for the demonetised banknotes.

• According to a 2018 report from the Reserve Bank of India Rs 15.3 trillion of the Rs 15.41 trillion in demonetised bank notes, or approximately 99.3%, were deposited in banks.

Demonetisation of 1978

• In January 1978, the Indian government demonetised Rs 1,000, Rs 5,000 and Rs 10,000 notes which was quite substantial at that point of time.

• The move was enacted under the High Denomination Bank Note (Demonetisation) Act, 1978.

• Under the law all “high denomination bank notes” ceased to be legal tender after January 16, 1978.

Supreme Court’s verdict on demonetisation

• The Preamble of the Reserve Bank of India Act, 1934, said the right to regulate the issue of banknotes is entirely with RBI.

• It also generally operates the currency and the credit system.

Key Verdict

• The court stated that the Centre has the power to demonetize all series of notes and that there was consultation between the Centre and the Reserve Bank of India (RBI) for six months leading up to the demonetization.

• During the hearing, two separate judgements were pronounced, with Justice BR Gavai supporting the demonetization and Justice BV Nagarathna opposing it. Nagarathna argued that only the Central Board of the RBI can recommend demonetization and that the RBI did not have time to consider the move properly.

• The verdict was pronounced by five judges, with Nagarathna’s being the only dissenting judgement.

• Earlier, during a hearing on December 7, the Supreme Court directed the Centre and the RBI to present relevant records relating to the demonetisation decision and reserved its verdict.

• The arguments of the Attorney General, the RBI’s counsel, and the petitioners’ lawyers, including P. Chidambaram and Shyam Divan, were heard. Chidambaram had called the demonetization deeply flawed and argued that the government can only initiate proposals for legal tender on the recommendation of the RBI’s central board.

Detailed Arguments In Supreme Court

• Four out of five judges ruled that the Central Government’s decision to demonetize Rs 1,000 and Rs 500 currency notes is valid, with Justice B.N. Nagarathna dissenting.

• The judges reframed six out of the nine original issues, including the power of the Central Government under Section 26(2) of the RBI Act and the proportionality of the demonetization notification.

• Justice Gavai ruled that the decision-making process cannot be faulted solely because the proposal came from the Central Government and therefore, demonetization cannot be struck down on the grounds of proportionality.

• The majority verdict ruled that Section 26(2) RBI Act cannot be struck down as unconstitutional on the grounds of excessive delegation.

• Justice Nagarathna argued that the power to demonetize currency notes should be derived from legislation or an ordinance, rather than a gazette notification.

• The top court heard arguments from the Attorney General, the RBI’s counsel, and petitioners’ lawyers, including P Chidambaram and Shyam Divan.

• The government argued that the court cannot revisit the demonetization exercise and the RBI argued that the decision was made on its recommendation and was an “integral part of nation-building”.

Demonetization

• It is the process through which a nation's economic unit of exchange loses its legally enforceable validity.

• Currencies that are terminated are no more legally considered exchanges and have no financial value.

• It is a process by which countries opt to reintroduce defunct currencies as legal money.

• Demonetization is the process of eliminating the lawful acceptance status of a monetary unit.

• It arises whenever the official currency is changed.

• The existing kind or types of currency are withdrawn through circulation and supplanted with new currency.

Reasons behind Demonetization

• Hyperinflation

• Elimination of activities like counterfeit currency, terror, and tax fraud.

• To introduce a new monetary system in some circumstances.

Advantages

• Control criminal activities

• Forbids tax avoidance and other financial crimes

• Contributes to a paperless financial system

Disadvantages

• Expenses issuing new currency and coinage minting can be high

• Illegal activity will not be stopped entirely

• May create disturbances among individuals

Conclusion

• Though the Supreme Court of India upheld the government’s decision to demonetize the currency notes. However, the demonetization process caused significant disruption and hardship for many people in India, as they had to exchange their old notes for new ones or deposit them in banks, and there were shortages of cash in circulation.