Was the Supreme Court Right on Demonetization?
This essay is an expanded analysis of the recent Supreme Court judgment on demonetization. A shorter form of this essay was first published in the Indian Express on January 3, 2023. In this piece, I expand on two facets of the majority judgment I find both problematic and interesting—the court’s inspection of whether the government’s action to demonetize all currency was proportional to the stated objectives, and the issue of whether the prescribed procedure for issuing the notification for demonetization was actually followed. I am enclosing my additions to the original op-ed within [-].
In January 2023, six years after the event, the Supreme Court finally issued a judgment on the constitutional validity of the demonetization undertaken in November 2016. At this juncture, the only good the judgment does is to provide legal closure to one of the most disruptive and painful economic policies in recent memory. The 4:1 majority judgment has found demonetization to be constitutionally valid. If the petitioners were looking to the courts for a cathartic moment, this was not it.
The heart of the dispute before the court was whether the government’s notification on November 8, 2016 was a legally valid exercise of power under Section 26(2) of the RBI Act. Section 26(2) states that on the basis of the RBI’s central board’s recommendation, the central government can demonetize “any series of bank notes of any denomination.” The issue was whether “any” includes “all,” thereby permitting the government to demonetize all 500- and 1,000-rupee notes. The related argument was whether the procedure set out in the RBI Act was followed.
The majority decided that “any” does, in fact, include “all,” based on a long list of previous cases where courts have decided similarly. The court also held that the RBI and the government followed the mandated procedure in issuing the notification for demonetization. It stated that the court’s role here was to confine its inquiry to procedural irregularities rather than to look at the substance of the economic policy. Within this mandate, the court found that the government had consulted with the RBI for six months prior to November 8 and sent a proposal to the RBI for its consideration on November 7. The RBI issued a recommendation based on this proposal, and this enabled the government to issue a notification under Section 26(2).
There are many other issues discussed within the judgment, but these two, in my opinion, form the core of the dispute—the extent of the government’s power to demonetize under the RBI Act, and whether this power was properly exercised. The court is clear that the government had the necessary legal power and that the procedural requirements were met.
[The dissenting judgment proposes a different argument, and I respond to it in detail later. However, a plain reading of Section 26(2) only requires two things: a recommendation by the RBI, and a notification by the government pursuant to the recommendation:
“On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that …shall cease to be legal tender…”
In the absence of any procedural requirement in this provision above, the only question to be asked is whether the government’s decision on the RBI’s recommendation was taken in so short a time, as to render any proper deliberation by the government impossible. Here, the court argues that the government had been in consultations with the RBI for over six months before November 7. However, the official draft of the RBI’s recommendation and the draft scheme for demonetization was with the government for approximately 24 hours. The majority judgment conveniently overlooks this fact. Second, it says that:
“259. The decision-making process is also sought to be attacked on the ground that the decision was taken in a hasty manner. We find that the ‘hasty’ argument would be destructive of the very purpose of demonetization. Such measures undisputedly are required to be taken with utmost confidentiality and speed. If the news of such a measure is leaked out, it is difficult to imagine how disastrous the consequences would be.”
This conveniently overlooks the role of the court in asking whether there was, in fact, too much haste. The fact is that while courts have limited expertise and power to inquire into matters of executive policy, they are in fact capable of judging cases where there is substantive non-application of mind. The court does not do so.
To sum up, in my opinion, the court is right in holding that the narrow procedural requirements have been met here in a technical sense. This is so because it refuses to ask whether the government could have seriously applied its mind to the official recommendation received from the RBI properly within 24 hours. It may well have found that it possible, but it does not ask this question, hiding behind the six-month consultative process.
This is even more apparent in the court’s judgment on the proportionality of the move to demonetize all currency. The court states that it is not competent to pronounce a judgment on economic policy issues. All subsequent courts can refuse to consider the proportionality of government decisions based on this judgment. There is no legal principle or standard that the court articulates which separates this case as unique or as within a unique class of cases where courts are not competent to adjudicate on proportionality. If the court is of the opinion that courts are not competent to understand the proportionality of government decisions compared to their objectives, an important pillar of judicial review of executive decisions falls in India.]
This [verdict on constitutionality] is rebutted by the single dissenting judge, Justice B.V. Nagarathna. However, those seeking succor in her judgment must do so with caution.
[The dissenting judgment should be seen as a direct response to the refusal of the majority to properly treat only the RBI recommendation made on November 7 as the first official communication under Section 26(2) to the government, and to ask whether the government gave itself adequate time to make up its mind before issuing the notification. The dissent however does not do so by directly addressing this issue.]
The dissenting judge makes an interesting categorization that provides the eventual framework for dissent. It states that under the constitutional framework, there are two avenues under which the government can demonetize currency—one through Article 26(2) of the RBI Act and the other through a parliamentary legislation. If the government goes through the former, it can only demonetize a limited set of notes (“any,” not “all”). If it chooses the latter, it can do anything the legislation says. On the basis of this distinction, the judgment states that since the government chose the RBI Act route under which it can only demonetize a limited set of notes, the government could not have demonetized all 500- and 1,000-rupee notes.
The dissenting judgment provides a second reason for unconstitutionality. It states that under Section 26(2) of the RBI Act, the RBI recommends, and the government decides. Therefore, the recommending body necessarily has to be the “originator,” and the “initiation” of the process has to take place within the RBI, and not within the government.
Both arguments are problematic. First, the dissenting judge provides no past cases or other evidence to argue why “any” does not include “all.” This is strange, especially since the majority ruling provides plenty of examples where courts have said “any” includes “all.” Yet, the dissent only insists that this could not conceivably be the case, which is weak reasoning.
Second, it is problematic to argue that if a statute defines one entity’s role to be a recommending body, any ideas or proposals leading to the recommendation necessarily have to originate from the entity itself. Taken to its logical extreme, it would mean that the RBI can never entertain any external suggestion or proposal under Section 26(2) before it makes a recommendation. How this would work practically is anyone’s guess. This is also absurd if one considers that the RBI’s Board itself contains members who are not RBI officials. If one of them proposes demonetization, would this be considered as “originating” within the RBI or not?
[The dissent should instead have directly addressed the question of whether there was adequate time, from the time of the recommendation to the time of the notification under Section 26(2), for the proper application of mind while taking this decision, even while balancing the need for haste and secrecy. Neither the dissent nor the majority judgments do so.]
Reading this judgment, one is left with a sense of futility in trying to identify how demonetization could have been resisted or avoided. The majority judgment highlights how all procedural rules were followed while subverting the applicable norms themselves. As the judgment implies, procedural safeguards provide effective checks only if all parties are equally invested in following them in spirit.
The dissenting judgment, on the other hand, provides a false sense of hope that reading new words into laws can insulate bodies like the RBI from external interference.
For those seeking closure, there are no clear answers here.
—By Anirudh Burman